This question came from a loving parent and business owner.
How do I define my role in my daughter’s business that I will be funding?
My daughter wants to start her own business in a field in which she is not only certified, with 5 yrs. experience, a solid client list, but has some excellent ideas in which to grow the clientele. She has no credit, so my husband and I would be taking out the loan on her behalf. How do we ensure that we get our ROI? She has already asked me to help her with bill paying and such. I have read the posts about silent partners, but I’m unsure that is what I’ll be.
Don’t go in blind
Starting a new business is not an easy endeavor and many businesses fail within the first 3-5 years. If they do succeed, it may not be until the 5th year until they see any profits.
Add to this the complication of loaning a child or family member and you are in very, very risky territory.
A new business is a gamble
It is very difficult to “loan” a children money, because even though they may initially recognize it as a “loan”, they often it do not pay it back. Other expenses take precedence and they are predisposed to accepting your help. This is doubly risky if you introduce the idea of “investing” or becoming a silent partner. You are now “investing” in a new business that may not succeed or may take several years to see any profits. Therefore if you have to take out a loan that you need to be paying back in a timely fashion, I do not recommend “investing” as a silent partner. Investments are not guaranteed to be paid back. A new business is a gamble. And if you do not have the money to lose, do not do it.
Instead – treat this as a strict business loan with payback expectations (along with any interest you agree as your ROI – as well as timelines for payback).
Have a signed contract with well-defined payment schedule AND consequences for defaulting on the loan. Avoid a payment schedule that states “payment due when business starts to make money” (or anything similar). Don’t tie the payment schedule to her business success…. BUT consider her Business Plans and income forecasts when defining a tangible schedule with actual dates. (Even silent partners do their homework to verify that the Business Plan is solid and there is actually a reasonable expectation of ROI)
For instance – Require her to show you her Business Plan with income forecasts, budgets, expenses, and forecast revenues. Help her with coming up a realistic Business plan. DO NOT TAKE OUT THE LOAN IN YOUR NAME until you see and approve of her detail business plan. Demand that the loan payment become a regular expense in their business plan (just like any other business expense).
Then create a calendar of payments based on her actual revenue forecasts. Review her company expense schedule to verify that the load payment is included as a regular fee of doing business.
Also include consequences for not meeting those payment schedules (late fees, payment in other forms, payment extension with increased interest rates, etc).
For instance, if her business folds or she abandons the business – she still needs to meet the payment schedule BECAUSE you still need to pay back the loan (regardless). Iron out all the scenarios and exit strategies if things do not go as plan. Do you expect late-payment fees, etc. How many months of non-payment determines an abandonment – and what would the next step in that scenario. Do you want to hold any collateral for payment, etc.
Do your homework
You will want to iron all these scenarios out and make the expectations clear up front. Do your homework to make sure this even makes sense. Or hire a business coach to help you with these decisions and help her with a realistic business plan. Understand the start-up costs, the recurring costs, the target revenue goals, what steps will be taken if the revenue goals are off-target, the resources and equipment needs, and everything else a realistic business plan covers.
If you don’t want to approach this as a business loan – then just agree to “gift” her money (with ZERO expectations of ROI or repayment). And only give her money you can afford to lose (not get paid back).
I know your situation is different. If you would like additional information on this topic, please contact LauraRose@RoseCoaching.info
I am a business coach and this is what I do professionally. It’s easy to sign up for a complementary one-on-one coaching call, just use this link https://www.timetrade.com/book/WFSFQ
With enough notice, it would be my honor to guest-speak at no cost to your group organization.