What is the role of a silent partner in business?
A dear friend and excellent businessman has approached me about being a silent partner for my art gallery. The extra financing would be great, but I'm hesitant to take the deal because I'm unsure of what other roles a silent partner plays in a business. How much decision making power does a silent partner have over operations and management, if any at all? What are their main responsibilities?
Expert Answers
Sort by Date
Sort by Votes
Apr 7, 2016
I have a theory. I won't share that.
Silent partners in art galleries are there for you to lose their money and nothing more. Ideally. But we don't live in an ideal world.
Apr 6, 2016
I would like to know id someone just gave you money to start your business and are just expecting a salary every month and don't want to be involved in the business.
Apr 1, 2016
Hi Zoe
Congratulation on your new venture and I wish you the best.
There are lots to consider.
Whilst the concept of “Silent Partner” may be viewed as Ray Badger and others have mentioned, I have to say this does not happen or expected to happen in reality. Silent partners are like investors, and just as investors they expect to be consulted over major decisions, as after-all it is their money that you are risking. To expect them to just watch and “Shut-up” is wholly unrealistic and unreasonable. Put yourself in their shoes. If you put up $100,000 for a business, would you just hand over the money and walk away in the hope that Santa Clause will bring you dividends at Christmas? Surely not.
In general Silent Partners as against Active Partners do not take part in day-to-day running of the business. However, they would be involved in your business review meetings and any major financial decision you make such as long term commitments to lease, major recruitment decisions, investment decisions, etc. If you borrowed money from via Venture Capital, they would expect the same with a seat (or two) on the board, etc. The reason they are called Silent Partner is because they are not taking salary and are not involved in day-to-day running of the business, but trust me in any other way they are neither silent or expected to be silent legally or morally.
Whatever you call it, once you accept money in return for a share of any business, you have to also accept you give up some level of control. The decision you have to make is whether losing your autonomy is worth the compromise. Also, partners can bring in knowledge, insight, and skills that you may lack hence can complement your abilities and view of business.
If the partner is a friend, I would say you need to be doubly careful. You may gain an investor but risk losing a great friend. This is not unlike having a best friend for years and one day deciding you guys are going to date. There is a risk you will lose a friend as well as your partner should anything go wrong with the relationship. So think carefully as you have more at risk than just your business.
Regardless of who becomes your partner, you need to draw up a partners agreement. This saves arguments later about the limits of power, divisions of responsibilities, as well as how you disengage (buy-out clause). My wife and I have been running 3 businesses together since 2006. We have been married for since 1985 and we are also each others best friend. Never-the-less we have a written partnership agreement as well as a living “Will” that includes not only what happens if one of us dies, but also what happens if one of us becomes incapacitated (I have a DNR due to my health which is included in this agreement).
Partnerships can be great whether silent or otherwise, but they can also be hell when they go wrong (just like marriages). Partnerships can be rewarding, enriching and lead to greater success as “the whole can be greater than the sum its parts”, but there has to be compromises and loss of autonomy. They may even say “Don't worry I am not interested in interfering” but as soon as you report your first loss, they will become incredibly interested! Understandably so.
Mar 31, 2016
Hi my partner and i are in the beginings of opening a large well known franchise and i just found out he wants to use a silent partner. He said he needed this 'silent partner' only to use a an independent director to use my partners super he said he would use me but was the only way he could do it in case we get audited.
Sounds dodgy to me or someones BS me .
Is this true.
Mar 22, 2015
A silent partner puts her faith in the business owner because, generally, a silent partner is not a participant in any business operations. That said, silent partners, by providing capital, obviously have a financial stake in the business. My approach would be to forge some kind of written operating agreement that includes an obligation by the business to report decisions and progress. I would also advise on a clearly defined, mutually acceptable exit strategy for both parties. Finally, and this is essential: what is the complete financial agreement and commitment back to the silent partner? Since a silent partner's participation is limited, I would argue there should be NO liability beyond losing the capital investment. And there must be a fully formed, clear agreement on repayment of capital along with some return on that investment.
Mar 21, 2015
The main concern of your silent partner is to assure a reasonable rate of return for their investment. At the very least they would want to be a second pair of eyes on your the strategic decisions being made; including decisions with a long term focus or high value. A more restrictive relationship may need second approval and penalty clauses.
From your perspective, you should evaluate whether the additional finance is a. required, b. at a reasonable rate (cost) c. legal and d. repayable from the cash being generated by the business. Look out for balloon payments which may seriously affect your available cash reserves.
Mar 20, 2015
It would depend on how much you give them. Typically you would treat a silent partner as an investor. They would get a percentage of your company which in turn would be a percentage of your profits. As long as you maintain 51% or more of your company you would make the decisions by having controlling interest.
Mar 19, 2015
The answers below cover this question you ask very well...Silent partners are to help you with capital and money, fund some of your ideas, products etc...They are silent as it relates to speaking for the company or organization, but participate in the profits...
Mar 19, 2015
Richard Stern-The conversation regarding participation, or not should be worked out in a Joint Venture Agreement.
Using this Agreement specifies all parties responsibilities with regard to the business..
Then there is no misunderstandings.
Richard
Mar 19, 2015
I think the most important way to move into this, is have a discussion with the friend in question about what they think their role is. If you go into a situation where the market says A, but your friend thinks B, then the friendship can be torn apart. I think there should be an honest discussion about what specifically they are to do.
Technically, a silent partner plays no role, other than to provide financing, and you to be able to make more decisions that positively impact the business through these funds. I think it's important for your friend to have realistic expectations. This is your first art gallery, and you're new to the whole thing, so there's a lot that will be learned about how it all works. There is a lot of risk in starting a new venture, and someone investing in the very beginning of business, cannot expect a ROI within the short-term.
Just being honest, open and letting them know that the financial assistance would be awesome, but tempering expectations from the ground level, could provide you with a much better experience, and friendship, with moving forward with such an agreement. Always remember to have contracts explaining investment involvement and understanding of ROI realities related to your new venture.
Good luck!
Bronwyn. You should start a new question on the forum and seek advice. Whilst related, this merits its own response from those who are familiar with Australian tax, accounting rules and legislations.