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?
A silent partner will play the role agreed in your contractual negotiations. Typically the silent partner only provides capital for shares, a share of the profits or both. The decision making power depends on the percentage shareholding, withholding the funding or simply the rights agreed in the contract. A silent partner should however cover their risk by having some form of veto right over expenditure and may also wish to see regular financial reports. A silent partner may have no additional responsibilities but may be requested to be a mentor to the business as well. Silent typically means "no active involvement". There is a lot more to be said on this topic but this is the core. You may also wish to read "the speed of trust" by Stephen Covey Junior, which will tell you a lot about the value of trust versus detailed contracts in such situations.
Keep silent I suppose, however really depend how you define it. Keep silent (don't intervene management but may involve some business activities) may not equal to sleeping (totally don't involve anything), again need to understand how you define it. This also needs to depend whether you are owning a company or partnership - the construction of the the "silent" agreement will be different.
For a partnership, a "silent" partnership agreement should be drafted.
If for a company, such agreement may not necessary if the silent partner only own the company's shares, he only has the interest in shares and vote based on the capacity as a shareholder - can't really interfere the company activities. However, if the "silent" partner request to be a director, than he is not that silent after all. Thus you need to ensure the silent partner should not have shareholding more than yours to such an extend that he can influence the appointing of director.
In more complicated case, the "silent" partner may wish to invest in a preferred shares to obtain so level of returns confident. In another case will be that he may offer to inject fund as a debenture holder instead.
So ...many considerations. You may seek lawyer or accountant for further advise. However an experienced entrepreneur with legal knowledge will be even better off - I would have sell myself if I stay in your country.
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.
Ray is right--a true silent partner has no management/direct involvement. You're smart to be hesitant, however, because there are a number of different factors to consider when taking on a partner or investor.
Beyond the obvious questions (terms, etc...) the question I would have for you is this: you've stated that he is a "dear friend." Could you afford to lose this friend if all goes wrong in the future, or would that risk be unacceptable? You should know going in that this is a non-zero possibility.
To be clear, I have seen plenty of people with preexisting relationships create successful partnerships (family, friends, etc...) but anytime you take on the challenge of building something new, you run the risk of failure. In this case, that failure could potentially include the loss of this friend. Given that he seems to have at least some relevant experience, you may want to raise this point directly, so that you can both be on the same page.
Assuming that you could tolerate this risk, or you two have enough trust in each other to believe that this risk is acceptably low, then it is just a matter of making sure that the other terms he has laid out are fair and equitable to you. At the end of the day, financing is not free, so make sure you're paying an acceptable price for the money he's offering. I would suggest you find a different person that you trust (who has relevant experience), to advise you through the process, because firsttime fundraising can often be a daunting task.
Zoe I would have to agree with Hugh, there are a lot of variable in having a friend for a business partner. If I were in your shoes, I would have a contract drawn up explaining his role (are lack there of) in the art gallery. I would even include and exit strategy to be safe.
There is no easy way to do business with friends. You may fail, he may lose money; but what you have going for you is he believes in you and what your trying to do. I would have a conversation with him to see what are his thought before going to the next level. One bit of advice I would like to give is make sure you get a signed contract before taken that step. Good luck !!
The best partnerships are those of equal investment, equal work and equal shares in everything. In my opinion, silent partnerships often give rise to a lot of problems.
1. RESENTMENT. The active partner often gives away too much of business to the silent partner and when further finance is needed, as nothing to negotiate with.
2. FRUSTRATION. The silent partner often gets frustrated when he can officially not make business decisions yet is seeing his investment going down the
I have advised clients to make alternative contracts. For example, the silent partner could finance the purchasing of initial stock and when that is sold they split the proceeds and repeat it again if they wish. So the business remains independent and the investor/silent partner retains ownership of the goods.
Hope that makes sense.
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.
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...
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.
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.
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.
There is a reason they call a silent partner a "silent" partner. The theory is they have no say in running the business. They stay "silent". So, they are supposed to keep their mouth shut and their checkbook open. If they have input in running the business they are a partner.
They do however get to share in the ownership and the profits (assuming the business is lucky enough to have one.
There is best definition in Businessdictionary.com
" Partner who shares risks and rewards of an enterprise or venture with other partners, but does not take part in its day-to-day management. Also called sleeping partner."
but you can change/modified the role of sleeping partner according to your mutual understanding.
A Silent partner is a partner like anyother partners ,But according to his agreement with his partners , attending the meetings ,discussing different issues & decision making ,his limits & restrictions to participates in different issues , As practical issues ,Silent parners don"t participates in taking any decision ,Not decision makers .
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.
I would assume that an investors decision power is based both on share of the business acquired and/or managing role agreed, he/she can however have no intention of influencing the business, this is common with investors with no time of know-how of the business area, but this stance can change with time. As for responsibility, it varies greatly depending on the contract defined by both of you.
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.
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.
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.