Investing in friends small business which I already work in

salad17

Hi all,

Looking for some advice here.

I work with a small local business (about 4 years old). The owner is looking to expand into areas of my expertise, we have been accepted for a government grant and I am considering investing a small amount of money, €2,000-€4,000.

I don't know what the business is worth now (or how this is calculated).

What sort of return should I expect/ask for? Would it be the percentage of my investment over the total value? But then where does the grant come into it, as this isn't money anyone invested?

While I work with the overall business in all areas, I would be more focused on the new branches of my expertise, can I just invest in those sections and expect say a 50% return on those branches plus wages for the sessions I run as part of the work?

That is what would be ideal for me, but then sometimes it might be unclear where work/marketing costs etc are directed, the specialised branches or the overall company.

Any advice would be great!

Slow down and get the fundamentals right to start with.
First things first, understand the current business and all the numbers related to it. You can't be investing in a business when you don't know the numbers. Make sure its healthy and growing and see what the owner is doing with it all.

Understand the structure - is he a sole trader, partnership, Ltd Company because securing your investment is different in all 3 setups with different types of risk. Will the new area be in the same company, or a new company - how does the old affect the new etc.

Then sit down with the owner and forecast realistic numbers based on the new area your going into. Not fanciful numbers, but cautious ones. These numbers will dictate salaries, ROI and all of that.

Establish at which point you can take a salary from the new area, or supplement your current salary. Establish how much revenue/profits is going to be reinvested into the business, and what is realistic to take in terms of a return and at what point so that the business continues to grow and your not pulling much needed funds out of it. Agree it with the owner and put it down on paper. At X point you get X return and so on.
It has to all be based around numbers and benchmarks. Once they are crunched the answers will pop out at you and you and the owner will be able to make logical decisions.

ironclaw

Gonna be frank, you are investing the equivalent of a months salary (or thereabouts) which the business if supporting a few employees should be doing multiples off. In other words, there outgoings probably far exceed what you are going to invest. Most of my clients would be putting similar figures to a marketing budget each month, and most of them would be small 1 to 3 people operations.

Whilst there is nothing wrong with a small investment, I'd be cautious how such an investment can make any really dent at all, especially after 4 years. An investment is supposed to grow a business and whilst €5k is gold dust in the bedroom start up days, I'd be expecting multiples of ten for investment figures in the latter years, especially if growth is good. Basically, why take an investment of €5k when your profit should really be eclipsing that on a monthly basis, just wait for months close and divert some budget as needed. If you don't have €5k to spare, I'd be seeing that as a red flag in terms of liquidity.

If €5k is buying you stock options, I'd again be worried if after 4 years that €5k can buy you a large slice of the company.

To answer your question in terms of return, I'd expect slighly better than a bank deposit rate in a savings account. You can't exactly demand much more as the risk on such an amount isn't there. If you are uncomfortable with a larger amount, I'd leave the money work for you else where.

That said, you mention that the growth sector is in your corner. I'd personally leverage a profit share or commission. You don't mention the industry, so I'm not sure how hard that would be to track, but its entirely possible. The value of your time and effort, provided you are growing the business positively, would be worth more than €5k (The equivalent 'raise' amount that a company would likely offer you year on year at salary review time)

TL;DR - I'd avoid any investment, value your time and get a return based on your growth in your sector for the company.

salad17

Thanks for the replies.

El Rifle you're right, once we sat down and talked about numbers it became a lot more clear. The business is growing, but we're going to enter into this new branch as though it were a separate business, however we will benefit from the current client base and marketing. I will invest for 33%, my brother (also an expert in this field) will invest 33% and the current owner will invest the other 33%. The grant will then match this, effectively doubling our startup costs (I know it's not really a startup as it's a developing business but we are treating it as such).

It's quite difficult to forecast numbers, it's a service we would be providing but it's hard to say how popular or unpopular it would be. The industry is seasonal and ends around october so we will know then what the return is and how much we want to re invest.

ironclaw thanks, it is just a small business though, between us and the grant we are starting up with about 18,000€. I'm not sure what a profit share is? It sounds like what we are doing, taking our percentage of the profits? And salary for the hours we work on top of that of course.