Investing in a friends company/business - advice needed.

[MillsyVRS]

Hi all,

 

has anyone ever invested in a friends small business or company?

if so, how does it work? I have some understanding of buying shares in a big company on the stock market, but if I was to invest in a very small company, how does it all work legally? 

What would I need to prove I had given X amount for a certain percentage stake or X amount of shares in the business?

 

Would it just be a friends agreement as to if or when a dividend was paid or wait for them to buy back my shares?

 

He said they value the business at £100k, and expect to be at just under £1m in a couple of years. Very big and attractive growth figures. Obviously i’d love to help a friend and make some money but also slightly nervous about losing money if there’s nothing in legal writing.

 

Thoughts and advice? I’m just not sure how it all works.

 

Thanks!

[Rustynuts]

First thing I'd want to know is how they arrive at a figure of £100k, and how they predict it to be £1million in "a couple of years". Ever watch Dragons Den pulling apart someone's ludicrous valuations?

[mac11irl]

Ever hear the phrase "never mix business with family/friends"

 

As rusty says... they want your money, they need to give the same opportunity as any other investor to be fully and properly vetted by you.

X10 business valuation in a seemingly short time frame is always based on absolutely every atmospheric molecule of air moving in "the company's" favour. And it never happens. Even google, fb etc were tiny struggling companies for a long time, and their growth were the tiny few exceptions that people kept betting on... take netflix/uber/twitter, on paper share price  worth billions but lose money like i lose socks... twitter has until last year at least never turned a profit..

 

You also need to have properly signed legal documentation outlining every clause, requirement, and entitlement that you have within the company written down and agreed. Sod "friends agreements" thats how most small business partnerships and friendships end up in small claims court and higher with the parties never speaking to each other again..

if the friend is genuinely looking for serious investors as a business opportunity he should be able to understand why you want to cover all the bases - for the protection of his investors his company and his friendships... if he cant or isnt inclined to give you enough info to make an informed independent decision then you need to walk away from it, as it will end in tears, even if the company does develop and grow (albeit slower than the house of cards model in the valuation might currently show )

[Breezy_Pete]

If the business is on a sound footing, it shouldn't want or need friends' cash.

If you do want to help out, do it on the basis of getting (only) the same return on your cash that you would get if you left it where it is.  Get that amount in writing if you must, but if you don't trust the friend enough to honour what you've agreed verbally, you probably shouldn't be lending them anything.

 

 

Edited 17 April, 2019 by Wino

[xman]

Ive been asked for similar advice on 2 occasions in the distant past. My advice was duly ignored, they trusted their "friends" and unsurprisingly both were declared bankrupt in a couple of years with debts of over £250,000 and lost their houses as well.

 

Some sage advice

 

In business there are no such things as friends.

 

If you don't know what you're doing, then....don't....

 

Leave financing to bankers, if they won't lend him money, nobody should.

 

Invest only what you can afford to lose

 

Learn to say no

Edited 17 April, 2019 by xman

[J.R.]

Say thanks for the offer, you are flattered but are not in a position to take advantage of their generous offer and will have to let someone else get rich instead.

 

Unless you wanted to bin them off as a friend anyway and the price is worth paying, because thats how it will probably end up.

 

I have lent a couple of girlfriends money when they have asked, in both cases it was a cheap and painless escape route for the future when I wanted to bail out, all I had to do was drop subtle hints about repayment and I was guaranteed never to hear from them again.

[MillsyVRS]

Thanks all for the replies. It may seem like it’s an obvious decision to say no but there were a couple of other factors not worth explaining that made it a little harder to say no. 

 

Just needed some of the above to help clear my mind and think straight on it. I’ve lent money to him personally before and always got it back, but businesses are always a different matter.

[CWARD]

As Rustynuts said how was the value of the business arrived at?  You seem to have some knowledge of the business and it's future so are there contracts in please for this jump in turnover. 

Regardless of your friendship you should think of this as a business transaction in which case you're buying into the company in the form of share that should be backed up by the assets within the company. The buy back (loan repayment) of these shares should be in a shareholders agreement. This will give some ownership of the business whilst allowing your friend to buy back the shares and repay the money you bought them for. If you have a form of interest you can add that to the buy back price and avoid paying income tax on it as it would be a capital gain covered by your annual allowance. If you're married have the shares in joint names and double the capital gains allowance if required.  

If the company fails you will have a claim on the remaining assets once the creditors have been repaid. If not enough assets to repay the creditors, they get pence in the pound and you get nothing.

 

The other alternative is a loan to the company. The details of how it should be repaid and with any interest should be legally binding in a contract. 

If the company fails and the company doesn't have enough assets to repay the creditors, yourself included, then you get pence back in the pound. You can have a floating charge put over the assets of the company which allows you to have priority from the proceeds of the assets sold over other creditors.

 

Whichever way you go, if you do at all, then have the accounts and loan agreement or shareholders agreement written up by a commercial solicitor. It will cost around £500 and the company should pay for it but they can claim it as a business expense for the cost of obtaining finance. If your friend is unwilling to do as you wish then don't bother loaning the money.

Edited 17 April, 2019 by CWARD

[KenONeill]

1. Only buy a shareholding in a limited liability company. This controls your loss in a bankrupsy to the nominal value of the shares, not the trading value, so if you bought 1_000 shares of 1 penny each, your loss (other than your actual investment) would be £10.
2. As others, don't invest money you can't afford to lose!

[Aspman]

Usual rules of gambling. Don't risk any money you can't afford to lose.

 

Plenty of sage advice above.

[Chris]

From the other side. I'm looking to develop my own company and won't be asking any friends or family to invest. They are friends and family, to offer support and have a completely different relationship. By bringing them in as business partners etc would muddy that and could jeopardise that relationship. 

[Tilt]

Friends agreement? No way, unless you are happy to lose both your friend and your money.

But imo if your friend is a good person and truly believes in the business (and a sensible and honest person, of which £100k to £1m in a few years questions this) and wants you to be a part of it, then it could be a good investment, but if he only wants the money then advise him to go to the bank.

IMO A good friend wouldn't have asked you if it was only the money he/ they wanted.

 

You state "he said they value the business............". Who is "they"?

 

I would want legal documents, for sure.