Investing in other peoples startups ?

StereoSound

I've been asked by a friend to invest in her business. She wants to setup a beauty clinic and is prepared to give me 25% of her business if I invest 8k in her.... She needs the 8k to get a lease agreement on a premises and essential equipment. I'm considering it and have reviewed her business plan. I dunno if 25% is enough stake though, I told her I want 45%..... I could loose all my 8k if she fails. I'm not sure how exactly I go about taking part ownership of the business ? Does the business therefore have to be in both our names ? I assume it does since she could take my 8k and tell me to feck off with me having no legal claim of said 45%. I really just want to invest , I don't want to be responsible legally for tax returns for her business or if she fecks up someone's face with the wrong technique.... She will be the one running the business, not me. I will not interfere with her on how she decides to run the business. I will just take my 45% of profits at the end of each month for as long as she is in business.

I have provisionally agreed to do this with her, but she is not happy with me taking 45%.

I have also requested to see her books at the end of each month to measure up her profits so I know exactly how much she owes me.. She seems abit hairy about this...

Maybe I shouldn't do this, but I thought I'd ask here.

neris

Is she looking for a loan or an investor? you say your taking 45% of the business but further down you mention owing you.

Squall Leonhart

neris wrote: »

Is she looking for a loan or an investor? you say your taking 45% of the business but further down you mention owing you.

I think he was saying he wants to see how much is made in the month so he can claim his 45% of that.

Monthly returns seem too frequent to me? Surely annual would be the way to go here?

Water John

Lots of issues to be trashed out. Legal struture, legal agreement, The wage of the operator, I presume she is not contributing sweat equity. The outfitting costs. Is she bringing a clientele list that has goodwill/equity value?

Tell me how

Ye both need to determine if this is a loan or an investment.

If it's a loan, the interest rate and time period needs to be worked out (this negates the 45% point)
If it is an investment for 45% of the business, then how is that calculated? Ordinarily it would be after all obligations for the business are met, rent, bills, insurance, wages, stock, advertising, initial outfitting etc meaning you could be getting 45% of a couple of hundred quid. What happens if she takes on more staff? Will you have a say on that even though it could eat in to potential profit margins. Who agrees with how much she pays herself? How do you value the business if say, for 3 years, it only makes 2k/annum profit and you want to get your money back and walk away.
You would likely have to become a director and be registered as such with the CRO and irrespective of that, pay tax on any income you make.

You could advise her to get a bank or credit union loan, or to try the local public enterprise office who provide grant assistance for people setting up viable businesses in certain cases.

If you both value the friendship you have, my advice would be, not to invest.

Water John

Not necessary to form a company, a legal partnership would do. This is really not a loan but an equity stake. My hunch is 25% is nearer the mark than 45%. The operator is bringing her professional skills to the project.
If 8K means too much to you, don't invest. If you can take the loss, should it happen, I would bite.
Be prepared, not to see profits for a couple of years, while business is built up. This is not stagnation as the overall value of the business is increasing. It might be a good idea to include a valuation mechanism so that she can buy you out if either of you wish that.
The big question is, do you feel she is good at the job and does she have the other skills to run a business? That is what you would be putting your faith in.

Fionn101

It does seem like this is new territory for you , and frankly I wouldn't bother investing.
If her business plan is solid she can borrow the money from a bank. Ask her why isn't she borrowing from an authorised lender and you'll start to see the beginnings of financial failings.

just my 2 cent worth , avoid like the plague

duploelabs

Fionn101 wrote: »

It does seem like this is new territory for you , and frankly I wouldn't bother investing.
If her business plan is solid she can borrow the money from a bank. Ask her why isn't she borrowing from an authorised lender and you'll start to see the beginnings of financial failings.

just my 2 cent worth , avoid like the plague

No matter how good your business plan is or current functioning state, if you've cr@ppy credit rating the banks won't go near you

Fionn101

yep ,I know all too well about a credit strike, and I think we are going after the same point.
If this person is avoiding borrowing from an institution that would do due diligence, like a bank , then alarm bells should ring.

and the OP seems new to this area, which their 'friend' may be taking advantage of.

Jim2007

StereoSound wrote: »

I've been asked by a friend to invest in her business.
................
I told her I want 45%..... I could loose all my 8k if she fails.

..........I will just take my 45% of profits at the end of each month for as long as she is in business.

The first think you need to decide is whether she is a friend or someone you can rip off for the rest of her business career.

If she is a friend then offer here a personal loan and keep out of her business. If you don't think she is good for it, then simply tell her you are not able to free up such an amount for the moment.

If you don't care, then get a good solicitor to make it water tight, because there will be hell to pay down the road when she realise what you have done. 45% of a startup for 8k is loan shark tactics, don't expect the friendship to survive it.

oceanman

Jim2007 wrote: »

The first think you need to decide is whether she is a friend or someone you can rip off for the rest of her business career.

If she is a friend then offer here a personal loan and keep out of her business. If you don't think she is good for it, then simply tell her you are not able to free up such an amount for the moment.

If you don't care, then get a good solicitor to make it water tight, because there will be hell to pay down the road when she realise what you have done. 45% of a startup for 8k is loan shark tactics, don't expect the friendship to survive it.

how is the op ripping her off exactly? he is giving her money that she obviously cant get from a bank...I would be asking for 45% too.

antoinolachtnai

You could give her a loan at 3 percent. Take 25 percent of the equity in return for giving the loan.

When the 8k is paid back with interest then she can buy you out of the 25 percent for some pre-set amount, say €25k.

This means that she will pay back 35k over say 4 years. This would probably fairly reflect your risk.

Unless you really understand what you are doing don’t expect to get much more than your money back and even then you are doing well.

The idea that you will take your share of the profits at the end of every month is just not going to work.

Axwell

This has the signs of a disaster all over it for a number of reasons. If you value your friendship more than your 8k then avoid it or at best consider offering a loan as per antoinolachtnai's post.

You sound out of your depth as regards investing in a business and your expectations are more than likely not realistic or in line with what will actually happen. Those are expensive lessons to learn at the sacrifice of your money and your friendship.

lastusername

StereoSound wrote: »

I've been asked by a friend to invest in her business. She wants to setup a beauty clinic and is prepared to give me 25% of her business if I invest 8k in her.... She needs the 8k to get a lease agreement on a premises and essential equipment. I'm considering it and have reviewed her business plan. I dunno if 25% is enough stake though, I told her I want 45%..... I could loose all my 8k if she fails. I'm not sure how exactly I go about taking part ownership of the business ? Does the business therefore have to be in both our names ? I assume it does since she could take my 8k and tell me to feck off with me having no legal claim of said 45%. I really just want to invest , I don't want to be responsible legally for tax returns for her business or if she fecks up someone's face with the wrong technique.... She will be the one running the business, not me. I will not interfere with her on how she decides to run the business. I will just take my 45% of profits at the end of each month for as long as she is in business.

I have provisionally agreed to do this with her, but she is not happy with me taking 45%.

I have also requested to see her books at the end of each month to measure up her profits so I know exactly how much she owes me.. She seems abit hairy about this...

Maybe I shouldn't do this, but I thought I'd ask here.

Yes, yes I imagine she isn't! Would you be happy if someone wanted to take 45% of your business and just collect almost half the profits in exchange for 8 grand?!

Don't go into business with friends unless you both know what you are doing and ideally have past experience running other businesses. 8k is not an insignificant amount of money to most people, but nothing in the grand scheme and certainly not for a business that may be around for years or decades.

She should chat with her credit union or bank or look into some other funding source.