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.
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.
Hi Cynthia, Family is Family, however Business is Business.
Its great that you are keen to help your daughter.
There are a few missing parts.
a. What is the size of the load.
b. Can you underwrite to full financial exposure.
c. How much would need to be paid each month to service the load.
d. Can the business in its current form meet the repayments.
If not how much extra would you need to put in to keep the business afloat.
The thing is the business needs to be viable. you can't trade as an insolvent business.
Another consideration is. what additional assistance will your daughter need in terms of manpower and man hrs, in order to free her up to do what is needed to make the business grow.
Like any start up, it is always a great idea to put together a business plan and develop a business model for growth. look at the next 2-5 years. work out what is required to grow the business along with what is required to sustain the new growth volume.
As business are business you should look at this unemotionally, and ask questions like how is that going to happen.
BTW you should be prepared to accept a very low or even ZERO ROI for the first 1-2 years, unless the business is sustainable now, which is doubtful considering she is already asking you to pay for bills.
You are welcome to contact me should you want further advice.
Good luck. George.
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,
Hello Cynthia. Do you really want to start business with your daughter?? My opinion that it is not good idea to have business with relatives.
If you really want than you need to do next - you should investigate the situation by yourself
1. The market - what is the volume (in $) and how many players are there.
2. What peoples wants and what they really consume.
3. market share. (services, prices, post sells, e.t.c.)
4. Finance -> Money in (cash flow) and Money out (expenses).
These all needs to understand what you really will get and how long it will take.
You might go to "google trends" and also use reports from department of statistic in your municipality to get the whole picture.
Solid client list that your daughter has - it is only list with names and phones. She or you need to check it again, cause peoples in the list might be had changed their minds.
I'm entrepreneur and clients behaviour is the most important, and ROI depends on it.
Once, you make it clear. Than, I thing, you might get understood how big loan you need. And then discuss with your daughter ways of partnering. You might cooperate as LLC where you will became as managing partner. Finally over here are many options.
Anyway, Good luck to you. Let me know if I can help you in future.
This is very risky. It's difficult to "loan" a child money. It often ruins family relationships -- because even though children say "loan", often it does not get paid back. This is doubly risky if you introduce the idea of "investing" or silent partnership. If you are taking out a loan - that you need to be paying back -- I do not recommend "investing" as a silent partner in your child's business. You may not get your "investment" back if the business doesn't work out -- BUT you still have to pay back the bank loan - all the same.
My recommendation is to 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 wth 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. Then create a calendar of payments based on her actual revenue forecasts. Review her company expense schedule to verify that what amount she can clear for the payment schedule. If this is a business transaction, approach it as a business transaction.
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 collaterial for payment, etc.
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.
If you don't want to approach this as a business transaction - then just agree to "gift" her the money with no expectations of ROI or repayment. And only give her money you can afford to lose (not get paid back).
The love of supportive parents is a great asset to any sibling that wishes to start a business. My reply is made up of 2 parts. First is the usual “Don't Do It” and lots of people have given you good reasons as to why. The second part is about how to do it, despite the advice!
Part 1 – Don't Do It!!
Family business is a romantic notion that can work in some cases and can backfire in others, like all other romantic ideas. As a parent that has helped both my children in their endeavours to set up their businesses, I would caution against financial commitment. As parents we are emotionally too close to them and hence may not ask the difficult questions they need to be asked. Failure of their business could not only cost you financially, but could also cost you your relationship with your daughter. My wife and I helped our children by supporting them in other ways than financial, and in fact we refused point blank to invest any money in either of their businesses (both our children set up their own businesses).
We did provide them (and still do) with free advice. We do this for our living so why not provide the benefit of our experience for free to our children. We even allowed one of them to live at home for 3 years at no cost so that he could set up his business without worrying about rent, utilities, etc. In the same vain, we are not bankers hence have no pretensions on understanding financial risk assessment involved in lending money to people. If banks are not willing to lend your daughter money, why would you?
Watching Children's failure is hard enough for parents, but you are adding financial costs on top of your potential heartache of seeing your daughter fail. 1 out of every 3 new businesses fail in their first 3 years, so there is a good chance you will be in this position. Incredibly 2 out of 3 businesses started by people who have failed in their first business become successful, so you have twice as much chances of success after your 1st failure. If you want ROI, I suggest you lend money to your daughter for her second business but not for this one!
Just to prove the above statistics, I set up my first business in 1988 based on a solid client list (I was the top sales person for 2 years in a row in a company with 120 sales people), my qualifications (I had a business degree), and I had 7 years of experience in sales and marketing (does this sound familiar?). Let me tell you that I failed!! I lost a lot of money (roughly $350k in today's money), we nearly lost our home but I learnt a lot of valuable lessons. I went back to being employed and in 2006 (once my children had left home) my wife and I started another business (actually it ended being 3 new businesses!). This time we have had incredible success. We have applied all the lessons we learnt from our failures as well as our experience gained in C-level positions in multinationals.
Part 2 – OK, if You Feel You Must!
If you still feel compelled to lend your daughter money, then as others have suggested, get her to write a business plan, cash flow forecast, etc. just like the bank would do. Then half the sales and double the costs, and see if the numbers add up (believe you me, halving the sales & doubling costs is optimistic!). If the numbers add up, then take a share in the business with a buyback option but the buyback option is not the repayment of the loan. The business should repay you monthly just as the bank would expect, so this is just your repayment (at low or zero interest if you wish). The buyback option is your ROI, so she can buy your shares at an agreed price (usually a multiple of profits or based on an independent valuation of the business). Of course if she is successful in 3 to 5 years time, she can easily borrow the money and buy you out.
This is the best deal any lender will offer her right now, and an investor would not even look at this no matter how brilliant her ideas are. Investors are looking for ROI (3-5 years), solid business plan, and solid market research, whilst looking for a seat on the board with some wanting control of voting shares (as against the shares of the company). It is not that easy to raise money for unproven business ideas.
I hope this helps and I wish you all a big success
When someone plans to start a business, one of the basics is business plan creation, legal and financial input from professionals, and thorough review of roles and responsibilities.
It sounds like you may have skipped all of these steps and went to agreeing to lend someone money with no written agreement. Not good.
This is basic, but you've disregarded all of it. Not good.
As a banker I question your capabilities if this is the type of questions you are asking a group of strangers and not your professional consultants.
I am the Community Manager for Business.com, so I see this question come up all the time. The Business.com team wanted to find the definitive answer for how to approach going into business with family. They shared their findings in a recent article, Tips for Keeping the Peace When Working with Family that I think you will find helpful.
Walking the line between both a professional and personal relationship can be difficult. My advice to you is to treat the loan for your daughter as you would a loan for a non-relative. Make sure you define the terms of the loan beforehand, and you both agree. Contributing money to the company would make you a shareholder. As a shareholder, you can decide how often you would like a report on the progression of business.
Believe it or not, many entrepreneurs will often do a 'friends and family' round first when seeking funding, before speaking to outside investors. So, I don't think it is out of the ordinary to invest in your daughter's business. The real challenge will be maintaining a work-life balance among your family. Good luck!
Starting a new business is not an easy endeavor and many businesses fail or do not meet their wished-for monetary projections. Businesses where friends and/or family members are providing the investment money are particularly tricky to navigate. I urge you and your husband to consult with a business law attorney to get formal documents in place that specifically identify your roles (if any) and your requirements for repayment of the loan (interest, payment schedule, etc.) Remember you and your husband would be the ones assuming the risk of repaying the loan. If you are nearing retirement and/or have limited financial resources (can you afford to NOT get repaid the full amount + at least the interest you are assuming for the loan from a third party?), then you need to consider 1) whether you want to invest at all; or 2) can you invest a lesser amount? Also, is this an equity investment or a straight loan or a combination. Will your daughter be setting up a business entity? If yes, who would the loan be to? If the business, will your daughter sign as a guarantor of the repayment due you and your husband? Conclusion - you need to treat this as a legal business relationship. Any business law attorney can tell of you situations where friends and family members no longer speak to each other and even sue each other because of problems arising with their joint business endeavors especially where relationships were not formalized from the get go. Running a business is not just about making money. Hopefully your daughter will understand that your "loan" relationship must necessarily be a business relationship. On another note, if she has been working for someone else, she may need to be careful in setting up a competing business and using a client list generated while employed. She needs to review any agreement she may have signed as a condition for employment. Remember you both have aligned objectives ==> the success of her new venture. Your requirements for establishing a formal business relationship would not lesson this objective and in fact may help her really develop as a savvy business person. Good luck to all of you!
A) If you are the one defining your role within your daughter's business; you are already starting on the wrong foot. (Sounds like it might be your business and you are giving your daughter a job. The CEO defines the roles.)
B) Your immediate role is financier, possibly shareholder.
C) To guarantee your ROI invest in government bonds or something secure. Start by accepting that any business is a risk.
D) As a shareholder/financier - establish how often and what type of financial reporting you expect. A timeline of when and how you will be paid back and what actions are to be taken if you are not. Also a safe bet is to agree not to intervene unless the business is in the negative for over X amount of weeks.
E) Most importantly if you are looking at a partnership not a silent partner role; be clear up front. Make it clear that there is a cost to your money and define what that cost is.
F) Your daughter may not like what you have to say (especially if you say all you have to say) but better a small argument before you start then a massive fall out month's in.
I'm not going to add to the comments that doing business with family is risky. I will say that investing in any business is risky, and she should have a business plan your accountant and attorney can review. They are impartial and objective. If asking for a business plan causes an issue with your daughter, then you really shouldn't invest. It should be a loan that she signs a promissory note to repay, either straight up or out of her inheritance. And then have her find her own bookkeeper because it's best if you stay at arms length and not have intimate knowledge about how the business is doing. That will cause stress for everyone.
If you do decide to invest, and she knows doing the books is not her strong suit and that's why she would like you to do it, you should be paid the going rate for a freelance bookkeeper. The business can then pay you for your work and she can issue a 1099 for the work.
You haven't mentioned what kind of business this is, but the cardinal rule of starting a business is to not commingle your personal funds with business funds, as this can open her (and through her you) to a lawsuit and you could be personally liable. Which is why she needs to give you a business plan so you can have your accountant and attorney review it, and if you decide to work in any capacity for the business you do not get paid under the table. Document everything.
It's great that you want to set it up in a legally appropriate way.
I don't think a loan agreement is necessarily enough, nor is a silent partnership, although depending on how the shares are split, it could be.
But in that scenario controlling interest will entitle you to the majority of the profit and that doesn't sound like your goal.
Since it's your daughters business and area of expertise, she should be the CEO and therefore have total control of day to day operations.
I think the role you are looking for is Chairman of the Board. That way you are not involved in day to day operations but remain the only person who can fire the CEO. With this arrangement you can bring in someone to right the ship if need be without taking the company ownership away from her. Set out in the contract a clear reporting schedule. Perhaps monthly reports for the first year and quarterly reports after that. As long as those reports are meeting your repayment schedule or the reasons for falling short are acceptable, you will not need to intervene.
There are plenty of nay sayer opinions already posted here, and I don't disagree with them. My main concern with this proposition is that banks are involved. If you could loan her the money and afford to lose it, without the bank, it would be a much better situation. If you are choosing to use a bank because your money is making a better return than the cost of the loan, that may be different. But either way, if you cannot personally afford for her to fail, it's a hard NO - don't do it.
If she is asking for help with bill paying, you might want to take a closer look before you invest. If she doesn't want an "advisor" on board, then this becomes as matter of signing a contract and agreeing upon the terms of payment. She is trying to make it on her own, which is admirable but unrealistic, we all need help. As Oprah would say, "Don't lend if you can't afford it."
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.
I'd like to step back a moment before we get ensnared in the weeds. Certifications and experience are 'a dime a dozen.' As are ideas. The only item in your question that indicates that - perhaps - your daughter can build and run a successful business is 'a solid client list.'
I would take a different tack. I would not do a business loan per se. I would not get involved in bill paying unless you like that kind of work and unless she were wiling to pay you as a bookkeeper. The reluctance to take on bill-paying might be a red flag that your daughter does not have the management skills or interest in the nitty-gritty details of owning and running a business. Cash flow. Money. Taxes.
If I were you, I would ask her for a projected 12-24 month cash flow analysis of the business, AND her personal budget. Any startup is a race with the clock to bring in enough cash flow to be able cover all the business - and personal - expenses of the founder. Once this happens, additional cash infusion isn't necessary. That's the end game here for your involvement. You need to see if this is likely. And, for example, has she cut her personal and expenses to the bone to minimize outside cash needed?
Look at this loan for what it is likely to be: a gift to your daughter to pursue her dream of owning her own business.
If you can't afford to lose the 'loan' money, pass on this opportunity, and tell her the reason. If she is truly such a good business bet, and she wants it bad enough, she will find another way to make it happen.
Hope this helps. Let me know if you would like an initial complimentary 15-minute phone consult.
Your role in your daughter's business has already been defined - that of investor.To ensure that you get the desired ROI, an agreement should be drawn up between you and the business detailing the nature of the investment and the required ROI.
Anything else you do for the business can be unpaid or paid as you and your daughter want but if you expect a return on your investment, that is best covered by an agreement.
One of the reasons for this is that should something happen like death of your daughter or sale of the business, your investment is protected.
Hope to have helped...
Dear Cynthia, one way to do this is to start up under a registered company with you as a director along with your daughter. The role you'd want to play is entirely up to you - whether you feel you can participate, or that she is operating in a niche which you don't have. In this case you may become a non-executive director. Next, on the ROI, you being the funding partner, (1) you can take a good percentage of the equity, or (2) share revenues with her, or (3) have a hybrid arrangement of both. This will not only give you a sense of comfort on your ROI, but also work as a motivation for your daughter to grow the business.
Hope this helps. Best of Luck!
I think you have to be careful how you define success or your "return". with family it is about so much more than the money and as has been pointed out it can be the ruin of a good relationship.
I have experience of lending to a younger brother and to in-laws. The first was tricky as his business affairs failed. I held him to repay at least the principle which a) took a long time and b) was quite stressful, but I decided that it had to be that way if he and I were to stay friends. He had to understand accountability while we accepted that we had taken a risk and lost economically as all we did get back was the principle - no return.
With my in-laws it is more complicated, but at the end of the day we are not doing it for economic reasons....well at least not ours.
Two pieces of guidance:-
#1 write it down and get it signed and witnessed. Make it "real", build some sort of commercial rate to it and stipulate a redemption date - it can provide a good focus.
#2 don't gamble (for that is what this is!) with money you cannot afford to lose....or at least not get back for a long while.
As to what part you play in her business, unless you have particular skills or contacts (other than being creditworthy?) I think you should stay out of it else you risk becoming responsible for the repayment or non-payment to yourself. Don't interfere - accept it is a gamble on your part and learning opportunity on hers. It may be that her success is the best outcome, but is is far from being the only potentially positive outcome.
I hope that helps?
Here are some things to think about which will help you structure the business relationship:
1- Do you envision being involved with the company long-term or only when your loan is repaid?
2- If you want a percentage of revenue ongoing, decide how much you want and how much should be reinvested into the company.
3- Discuss with your daughter how involved you want to be - do you want to be part of day-to-day operations or only for strategic decisions?
4- Discuss with your daughter what the company would look like in 5 years and in 20 years (different locations, number or employees, etc.).
Once you have an agreement of your involvement, meet with an attorney who specializes in small businesses. They will help you choose the right legal structure and ways to limit liability. Also, meet with your CPA to ensure you are handling business expenses correctly.
I would suggest that you work with a Score Counselor in your area to develop a business plan..... The most important issue here is for EXPECTATIONS to be understood by both parties so TRUST is established. Doing a business plan with a Score counselor will get you started in the proper direction...
Once a business plan is written up, you will have a guides as to what expect from the business based upon projections and then be able to compare the projections to actual---By week, month, quarter. annual etc. Once you have a plan with revenue and financial projections, you can discuss your mutual roles. It will be like your being her banker/financial person/ administrative assistant.... CFO