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.
There is nothing you can do to "ensure" you get a ROI nor even your principle. You are taking a leap of faith and potentially taking a risk of your own successful retirement to help her. Ok, that doesn't mean you shouldn't do it.
What Richard is suggesting helps make sure you get paid from profits. In addition to ownership you need the partnership agreement to spell out how you will get paid. As a financial advisor I always tell my clients to think of a loan to a child as gift as it is very possible you will not get paid back, no matter what their intentions are. I also run a financial plan for my client so they can see what the impact of such a loss of resources means to their retirement.
I probably should have started with, what size of loan are we talking about and what is its purpose. Is this money for her to survive during startup or are you funding capital costs for the business (do they have value). What will you do if she goes on vacation before you get paid back? Reach out directly if you would like to discuss more. (I cant embed my email here).
All the best for you and her either way,
Your goals are, at least as it appears, to help your daughter succeed with her business while teaching her financial responsibility and preserving your caring relationship with her. Here are some ideas for you to consider.
I suggest that you and your husband borrow the money, then loan it to your daughter and treat it as an arms-length transaction. That is, execute a Promissory note with her so that it's a legal document. Perhaps even give it to a lawyer to prepare or review. If you want to make some money from the loan, you can charge more interest than that charged by the lender, but if you simply want to help your daughter succeed and not profit from the loan, you can just charge the same rate that the lender charges.
When your daughter repays you, it would be better if it's based on her business's positive cash flow. Either you can be repaid in full with interest, or you can receive a percentage return on your investment. If the ROI approximates the loan repayment plus interest, it can still be classified as a loan. If not, it would be closer to being an equity investment. The problem with fixed loan payments is that they can handicap your daughter's ability to pay necessary bills or expand the business, which would make it harder for her to repay you in full. I recommend that you request financial statements from her periodically to report what her financial condition, earnings and cash flow are; asking that an accountant you both agree upon prepare or review them would be a sensible precaution.
Only if you have experience in or special knowledge of your daughter's industry, or if you and your daughter know someone you both trust, like a friend or family member who possesses those qualifications, should you invest in your daughter's business as shareholders or partners. Even then, you shouldn't be involved in running the business or giving business advice, unless your daughter asks for your help.
Also do what you can to help your daughter build up her credit, such as adding her to your credit card account or helping her establishing a CC account in the name of the business, but be sure to establish a spending limit for her. In fact, it may be to your advantage to loan her money in increments, a little more each time, and with a credit card as well, as she proves her credit-worthiness by repaying you. Or you can advance her the funds she needs on an as-needed basis, such as for paying bills.
Much of what I'm suggesting comes from the online publication "Entrepreneur" in this article called "Friends / Family Financing", that you'll find at:
The name of my business is Gary Krupa, CPA. I offer accounting and tax services. If I can be of additional help, please feel free to contact me.
Hi Cynthia - you could just get a loan agreement from your daughter to repay the amount you borrow plus the interest. Or you could make it a little bit more complicated and take a percentage of ownership in the business to cover your risk in borrowing that money. You should consider talking to an accountant and a lawyer about special ways the business can repay you with business profits. If its an issue, you should be able to do that without having a management say in the business operations. I know it sounds complicated and maybe even a little "cold" for me to say those things, but its actually not that uncommon of a practice. And it may be important to explore these things because I don't want to see another business venture affect the relationship of a family. It can be less of an issue if its all discussed before hand. Good luck and let me know if I can help in any way.