Question Good Evening, I would really appreciate some advice on the setting up of our new business. My husband and I have managed to find someone willing to invest in our domiciliary care firm in Scotland. They were initially going to invest £200K for 50% cut in the business but it will now likely be around 100-130K. We will carry most of the workload but they will have input, in particular with franchising and business diversification. They are very successful business people who will have a lot to offer but we do not want to sell ourselves short. The investment is a loan but they state they are not too bothered about interest on it (I would hope not for a 50% cut!!). My questions are: 1. What is the normal percentage cut in a new business in this climate? 2. What are the normmal repayment terms and timescale for the loan? Really hope you can help. Many Thanks in anticipation, Gaynor
Answer Congratulations on your new business idea and finding an investor who can bring both money and expertise- not easy in this economic environment. I hope you have talked to other investors and have an idea that this particular investor is offering reasonable terms. If you haven't, then I suggest you do so as soon as possible- it is a good rule of thumb to get three quotes on about anything prior to purchase, investors should be no different.
Do you have a written agreement with the investor? You need something (a shareholder agreement and loan agreement at a minimum) that will spell out details including the amount of cash invested, the interest rate, shareholder voting rights (who picks the President and who can authorize salaries, distributions, and other expenditures), buy/sell agreement (so you can buy them out at some point), and other ownership issues that will come up in the future.
As for what is normal, are you giving them 50% of the profits for a time, or 50% of the ownership? 50% of the ownership means there will be questions of who is in control- I always recommend shooting for 30%, which is a significant stake, but leaves room to sell more ownership later and still keep control. The interest rate for a non-secured loan would typically be higher than prime, say 8-12%, but again, this depends on the valuation of the business and what your alternatives may be. If the loan is secured (by business or personal assets), then you should be looking for a lower rate (and perhaps talk to a bank to see how much you could get from them at prime rates on a secured loan). Repayment will ultimately depend on your business results, I'd be wary of any repayment requirements that you're not sure the cashflow of the business will support- it would be a great shame if you did all the work to get this going and then lost your ownership because you couldn't make the payments. Hopefully, your business plan shows you have free cash flow, under conservative assumptions, three times the repayment amount.
I would recommend you find a local tax attorney who can advise you on these issues specific to your country, business, and specific situation. While this may add time and expense up front, you may only get one shot to get your dream going, and you won't want to find it a nightmare down the road.
