My girlfriend managed the third-ranked Allstate agency in the Midwest in 2014 and is pursuing opening up an agency herself by July 1, 2015. She needs to have $70K in the bank at the time of signing. My parents are reaching retirement and will be investing the $70K. What is a fair way to calculate the return for my parents? My parents are approaching this as an investment and will want to see some sort of return. What should they expect? Thanks in advance!
An agency is an instant cashflow model business.
Ugly to scale due to logistics of a team and the mess of being in a client-service business model.
But easy to rapidly monetize.
Make a phone call. Close a client. Collect the cash. (Yes, that's a bit over simplified).
Your girlfriend shouldn't grab a dime from anyone before locking in her first client.
An agency can be entirely self-funded and there's little reason to pursue funding.
After she had generated her first $50,000 in clients (for example), she can supplement growth with debt financing.
And, in no way, is the idea of your generous, retiring parents investing $70,000 into a first time business owner, when statistically most businesses fail ... a good idea.
Fair rate is a flexible concept.
If I was lending out $70k, I'd want to see 3x $210k back as a minimum. Irregardless of whether that is "fair"... it would be the minimum (for illustrative purposes) where the process of the due diligence and contracts and parting with $70k liquid in trade for a "maybe" $140k gain would be of interest.