Friends and family have offered to invest in my business – should I accept?
“Friends and family” – the often-heard phrase sounds innocuous and usually crops up on phone tariffs to enable free calls to selected numbers. However in the harsh world of business the practicalities of “friends and family” investing in your idea is in reality something of a hornet’s nest.
Many employers have a policy of not employing “friends and family” although often employees have become the former. On rare occasions in times of great need those wary employers might offer them fixed term or temporary work on the strictly understanding that it is purely short term to help them.
So why should you be so concerned about these seemingly nice people to the extent that you might not offer them a permanent job and certainly avoid taking their money to invest in my business?
The starting point to remember is that once you sell somebody a stake in your business you have made a commitment that is legally binding and more often than not removing them from the equation is either impossible or ruinously expensive, often precipitating the end of your relationship or for family members the creation of an enmity that can last for generations.
For all the business success stories that started with an investment from a sibling or best friend there are myriad failures littering the wayside, so why is this?
The starting point is to understand that when a business becomes a rip-roaring success and there is plenty of money about for everybody to share, there is nothing to worry about and it can be a fairytale ending. However, most small businesses only ever make enough for one person to live comfortably and when you are taking out a decent wage and not paying anything to your investors, eyebrows start to rise.
Imagine you have sold half your business to your best friend because you were desperate to raise finance and it makes a profit but doesn’t reach the potential that you both believed it would. If you are struggling with what you take home as your fair wage for full time work then your friend is unlikely to complain too much by his lack of return, but what if you feel you should be earning a higher wage to reflect the long hours and stress and award yourself more money ? Conversely, your friend may block your wage rise and you will be feeling very aggrieved.
New car on the drive? Large extension? Dream holiday?
Who is really paying for this in the eyes of your investor?
Consider another scenario. The business is successful and your sibling wishes to sell their stake which may entail selling the whole business, but you as the worker are unwilling to do so. The permutations of stories and scenarios is endless but I think the lesson is clear.
Only use friends and family as a source of funding if absolutely necessary and even then make sure everything is clearly documented by a commercial lawyer. It may cost more but it could mean the difference between maintaining a relationship and destroying it unwittingly and needlessly.
Every person has their price – but what price do you put on a relationship?