Forums: Discussions for entrepreneurs and small business.

   My mom and I have had a small business with each other for the past 3 years and have been relatively successful. We travel throughout California selling at fairs and festivals. We would like to start a new business continuing to sell at fairs, but do not currently have the start up money. I have a friend that is looking to invest as a silent partner. He knows nothing about the business, he's just looking to make some extra money, as he has his own full time job. We have never taken on an outside partner, and do not know what the standards are. What would be a fare percentage of money to pay him since he'd give us the initial money, but we would be doing all the work and have the expertise? Also, is whatever the percentage is that we agree to pay him back just a percentage of profits, and would we deduct the cost of inventory, booth fee, hotel, gas, etc.? Lastly, if he's a partner he partakes in any losses, what exactly does that mean in terms of the amount of money we are suppose to pay him back? Any insight would be greatly appreciated!!

Thank You

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I highly recommend speaking to a qualified business attorney and a CPA before you agree to anything.

Ideally, you should borrow the money for an agreed upon interest rate and term, if you can afford it and your friend agrees to it. You could make interest only payments in the beginning with the option to payoff earlier than the agreed upon duration if possible. This will protect your interest in the business and avoid all the pitfalls associated with partnerships. The downside is you'll have to pay it back whether the business succeeds or not.

If you decide on a partnership, you'll need to give away a percentage of your business in exchange for the investment. Most investors expect some sort of exit strategy to realize the gain on their investment (e.g. selling the company or IPO). If you're not planning to substantially grow your business to the point of being able to sell it or to buy your investor out for a profit at some point in the future, a loan is a better option.

The good thing about an investor is that if your business doesn't succeed, your investor will lose whatever money that can't be recouped and you won't have to repay the rest (assuming you document that in the partnership agreement). The bad thing about this type of investor is that silent partners rarely remain silent, which could lead to conflict down the road if he doesn't agree with how you're running the business. 

The best thing you can do is find a qualified business attorney to help you make the decision and draw up the agreements.

Good luck!

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JP Stonestreet Author of Web To Rich Don't make a living...make a million!

WhitWhit,

There are a number of ways to structure a relationship where one party supply's some capital while others run the business and do the work. Determining the "optimum" way to structure your relationship will depend upon the goals and objectives of the parties involved.

For starters, consider:

   1. "What is his/her reasons for getting involved?" (big return, income, ?)

   2.  What if - the business fails? What will be their reaction -toward you? What will be yours toward them?

When thinking about how to structure the agreement consider the following points separately:

1.  Ownership of the business
2. Decision making and control -both the long term and daily operating decisions
3. Distribution of results (ie profit /loss)
4. Compensation to those working in the business

 

I know these are general in nature but I hope it helps. If you want to discuss your specific situation, feel free to drop me a PM or contact me directly.

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Business Growth Masters, LLC -
Capital Catalysts for Entrepreneurs
Home of the Scalable Business Plan and QuikStart Capital Programs
http://www.bizgrowthmasters.com
info@bizgrowthmasters.com

Hope you got the help you needed!

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Hello, check out my description if you're an investor!

Investors are always great to help get a business off the ground. For you, I would hire a Private Equity lawyer. If this is your main source of income, hire a professional that way you are protected just in case anything happens!

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