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Welcome. Most interesting post. It always gets down to the MONEY.
In general, I agree with you, I also don't believe that working with family is a good idea.
However there are always exceptions to that rule.
A family business can create ties that bind a family together and build a family legacy, but that is NOT the question
On the other hand, working with family may because problems by straining personal relationships.
With you being the main financier, will you be getting a salary??
Have you worked out HOW and WHEN you will be getting your funding returned to you??
Have you prepared production plans, pro former income statements and yes a business plan??
YES I know, I am asking more questions than giving answers, but my questions will give ideas to think about.
Finally you should talk to your lawyer and get some agreement in writing.
YES it is family, BUT is also YOUR TIME and YOUR MONEY.
Though I am financing the project, it will still be a barebones/shoestring budget with enough for initial product, rent, insurance, advertising and liscensing. The initial capitol investment is projected be returned within 5 - 6 months from initial investment. My main concern and question should have been this; What type of arrangement would make sense with a business partner that will put in all the labor to run the business, while I front the capitol for the initial startup?
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just a thought. i did the same thing. here's how we did it and why.
all must agree that the business needs money to operate, the person operating the business needs to make a living and you need to get your money back. with that being said, we did a 1/3, 1/3, REMAINDER. and it was cut like this.
the business operating direct and indirect costs were paid first. then what was left was distributed into the business checking account, the operator and then the payback. because it is family, we found out that this is the very best way to go.
the business MUST have operating funds. if the "money machine" runs out of fuel, the remaining 2, (a.k.a. you and your relative), are screwed. so priority 1. the business. priority 2. the operations guy. and here's why he's second.
if the business has fuel, but isn't operating, you are back to the money machine not generating revenue. priority 3. sorry, but you are last in line.
BUT, with the ability to look at what the operating costs are, cash flow, etc, and actually sit with the person running the business and having clear communications, you should be able to see where every dime is going, and then be able to get your funding back at an affordable rate, whether it be 1 dollar that month or 10,000.
so if one month you make 1000 dollars, after the business has been paid and checking account has funds, the business pays him his "cost of living"...then you are entitled to the remainder. I would discuss this first. see, he doesn't get to share the profits until you are paid back.
now presume that you have a windfall month. let's call it 6000 left over. does that mean that he should get 3000 and you 3000? i would like to think not. since what his cost of living has been determined and met, the remainder should go to paying you off. get your debt out of the way.
why? and this is where families get upset. because you can not save money if you owe money. so when the profits are up, YOU now become the priority. when they are down, you are last. those were the ground rules when we did it and it worked out fine.
then when you are paid off, and hopefully they want to expand, the money is there back in your pocket and you can do it all over again..... actually you are a "flexible funder"...
hope that helps..
Any investment in a business should be about return. What return do you expect from your money. Banks ask for interest rates - that is their return. Investors ask for shares that when cashed out will provide them returns.
Most banks are getting between 10% to 15% a year in interest. Most professional investors expect 25% annual returns.
You also have to think about how you will put up the money.
If you are getting equity - then it should be a pre- and post- money deal. Example: You both agree (or at least you do) that the business is worth $250,000 as it stands. You put in say $50,000. Thus, the business, post-money would be worth $300,000. Your $50,000 is 17% of the total amount. Thus, you should own 17% of the shares in that business. Now, if you also plan to work in that business - then this should not matter as you should receive a salary for your work.
Or, you could make a loan to the business. Loan the business say $50,000 and let the business keep it on it books as a loan - just like it would from a bank loan. Then, the business pays you principal and interest each month.
Lastly, know that you can create nearly any deal you want as long as all parties agree. Just get it in writing. Also, the IRS has specific rules regarding what they consider fair. Thus, if the IRS thinks deals like your should get returns of say at least 10% but you are only getting say 2% - they might step in and fine both of you. Thus, it would not hurt to run your deal by your CPA or attorney before final signatures.
I am getting ready to finance a small business project that a family member has been planning for a while. While I personally don't believe that working with family is a good idea, the idea is sound. Marketing strategies are in place, product planning has been done, location is prime and ripe for the picking, I just wish that I had thought of the idea first. (And I have complete confidence in the person to be running the business)
Seeing that I will be the main financier for the project and he will be doing the labor/management what type of arrangement should be made at this point about the sharing of profit/loss. This is a first for me. I have ran a business before but was not responsible for the financing in any way; I scheduled for the production and install of the facility.
Any Ideas or advice?