John LaforetBusiness Founder, PR and Communications Expert

Founder of Broadview Strategy Group. Communications expert focused on public affairs, sales and marketing and community engagement. Keen understanding of government decision making, grassroots fundraising and shifting public opinion.

Recent Answers

Understanding the specifics of your opportunity are necessary to provide a sufficiently detailed answer. Based on the information you have provided it sounds like the seller is looking for investment as opposed to a loan, so it may not be possible to offer a shareholder loan as a percentage.

As a shareholder in a private entity, it is important to have a very clear understanding of the rules that governs the corporation itself. Unlike publicly traded firms, most shareholders of private firms are active in their investment.

Will a 30% share grant you the option to be involved in business decisions? If not you may find you have challenges receiving any return on investment as management will have considerable latitude to determine whether there is any net income to pay out as dividends.

Does the 70% shareholder work for the company as a full time employee? How is their compensation set? Will you have any oversight in this regard?

I would strongly recommend you approach this deal by seeking a shareholder agreement that is similar to a partnership agreement where the major decisions are made through a process that involves you, while the day to day is managed by the active investor.

I would also ensure that your ROI is sufficient that your capital investment is replaced fairly quickly as it does not sound like your investment will have much, if any liquidity to it.

If there are more details of this you can share, I'd be happy to provide greater specifics.

I have both started a business of my own and leveraged it's success to purchase another company. Your girlfriend has the expertise to understand the challenges that starting a new agency will bring.

Fundamentally, what is more important than the rate of return for your parents is the extent to which there is security on the funds. If they are nearing retirement replacing this $70,000 in principal may not be an option for them if it is lost.

Does your girlfriend have a solid business plan that is realistic and demonstrates an ability to service the debt's principal over a time frame that is acceptable to them?

A standard business loan would seek repayment over a five year period with an interest rate of approximately 6%, assuming you quality.

The key difference with borrowing from family and all private lending in general is that the length of the loan is often shorter as there is a desire and need to actually be repaid in full.

My advice would be to have your girlfriend show your parents a detailed business plan, highlighting expected revenues and expenses and what efforts she is going to undertake on the expense side to guard as much of their investment up front as possible. She should offer a repayment plan on a timeline that is acceptable to them and affordable to her and offer an interest rate of between 6-8% and some security to ensure that even if this venture is no successful, they will be repaid.

I have arranged approximately $250,000 in vendor take back financing (private loans) for ventures I have been involved with over the last two years and have a good understanding of the details for both parties in these types of arrangements. The highest interest we've agreed to is 8%, with asset backed security for the lender and the longest term we've negotiated is 3 years.

Because this is your parents, you should be able to do better I would expect, but a five year repayment with a 6% rate would seem reasonable to me for both sides.

If you have any follow up questions, let me know.

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