Investing in a New Business

killie77

Hi
Looking for some advice. My Stepson is in the process of opening a Car repair and Mot garage.
He has enough to cover the Deposit and Rent on the premises.He is in the process of applying for an Asset Management Loan, which should cover about 80% of the equipment he will need to get started. I have £20000 in disposable income, which I am considering investing in his business. He has some projection of profits over the first six to nine months, which he has drawn up along with a business plan. I'm sure he will make a go of it, he is a terrific mechanic. and has a lot of knowledge of the motor industry. What I'm trying to work out is if I put 20000 in to his business what could I expect as a return over say the first 12 months.I know its difficult to work out , in real terms how well the business will do in the real world nothing is guaranteed.
His projection for the first twelve months after paying out for equipment etc. is roughly about £125000 profit. He is willing to give me 8 percent of Profits on my initial £20000. I would also be working their possibly 3 days a week, on an hourly rate which we will discuss.
Could anyone with more knowledge than me, tell me if this is a good way to invest £20000.
Or should I just stick it in an ISA for a year.
Appreciate any replies.
Ian

Dazed_and_C0nfused

killie77 said:

Hi
Looking for some advice. My Stepson is in the process of opening a Car repair and Mot garage.
He has enough to cover the Deposit and Rent on the premises.He is in the process of applying for an Asset Management Loan, which should cover about 80% of the equipment he will need to get started. I have £20000 in disposable income, which I am considering investing in his business. He has some projection of profits over the first six to nine months, which he has drawn up along with a business plan. I'm sure he will make a go of it, he is a terrific mechanic. and has a lot of knowledge of the motor industry. What I'm trying to work out is if I put 20000 in to his business what could I expect as a return over say the first 12 months.I know its difficult to work out , in real terms how well the business will do in the real world nothing is guaranteed.
His projection for the first twelve months after paying out for equipment etc. is roughly about £125000 profit. He is willing to give me 8 percent of Profits on my initial £20000. I would also be working their possibly 3 days a week, on an hourly rate which we will discuss.
Could anyone with more knowledge than me, tell me if this is a good way to invest £20000.
Or should I just stick it in an ISA for a year.
Appreciate any replies.
Ian

Are you content to lose the whole £20,000?

If not then stick with the ISA and help in other ways.

GDB2222

This £20k would be buying shares, or loan stock, or what? Or, it's a personal loan?

8% of £125k is £10k. £10k pa return on a £20k investment is in the realm of Too Good To Be True. 

Cloth_of_Gold

You say his expected profit is £125K in the first 12 months 'after paying out for equipment etc.' Are you therefore saying this is his expected net profit or are there costs not covered by the 'etc.'? If so what is his net profit expected to be? Is this a realistic figure for a business starting from scratch? Also is it 8% of the whole of the net profit he is offering you, and is that for as long as your £20K remains invested in the business? What if you want/need your £20K back?

Altior

That profit figure is pretty meaningless in the abstract. Investing in equipment has little correlation to profit, but is that net profit, gross profit... Projections are meaningless until there is tangible evidence to base them on. It's cashflow (lack of) that kills most businesses, even when they are profitable on paper. 

Business and family are not often a good recipe, and you're considering being an employee as well. 

Personally, I can only see pitfalls with this, and certainly not something to be investing in and hoping for quick returns.

born_again

How long is the deposit & rent covering for?
How much is the 20% of the equipment not covered for him to start, where would he get the rest?
What day to day working capital does he have?

TBH, a new business & expecting a return over 12 months. 5 years at least would be a more reasonable time frame.

Hoenir

killie77 said:

His projection for the first twelve months after paying out for equipment etc. is roughly about £125000 profit. 

What's the projected turnover for the business inthe first 12 months? 

killie77

Thanks for all the replies.
I'm as in the Dark as I was when I first asked the question. I’ll find out if he is talking about Net or Gross Profit.I guess in context it would be more of a personal loan to give him some Cash Flow.
He is starting the with the help of the Scottish Business endeavour. I’m not sure how they help out.
i might have miscalculated how much my return would be. I think it would be more in the region of 5%, not sure where the 8% figure came from. Probably wishful thinking..
I understand that investing in a Business where family is concerned, is never a good idea. But im willing to take a chance on that.

Hoenir

I understand and commend your willingness to help your stepson. However really dig deep into the business plan numbers. How realistic and achievable are they.  Don't put added pressure on him by expecting an immediate return on your investment. Keep your business head on. 

LHW99

With any new and untried business, you could lose the entire amount.

Also you (and he) could make the predicted amount, maybe more.

How much do you personally know about his trade and running a business in general? Because even if the idea is viable, and he can generate cash flow from day 1 to cover loan repayments, insurances, pay of any employees, rent and enough to ensure he can continue to maintain his family, there may not actually be net (surplus) profit for several years. From running a micro-business, I remember our basic costs were multiple £000s per month. If invoices weren't paid on time that still had to be funded from reserves - that won't be there for the first year or so.

However, if you trust him, believe in his vision, and can really invest the money with the view that everything heading down the pan won't sour your relationship, go for it. If it works out you and he will be able to congratulate each other on your foresight.

Cloth_of_Gold

killie77 said:

Thanks for all the replies.
I'm as in the Dark as I was when I first asked the question. I’ll find out if he is talking about Net or Gross Profit.I guess in context it would be more of a personal loan to give him some Cash Flow.
He is starting the with the help of the Scottish Business endeavour. I’m not sure how they help out.
i might have miscalculated how much my return would be. I think it would be more in the region of 5%, not sure where the 8% figure came from. Probably wishful thinking..
I understand that investing in a Business where family is concerned, is never a good idea. But im willing to take a chance on that.

In your OP you said " He is willing to give me 8 percent of Profits on my initial £20000." Now you are not sure where that figure came from and that it night be inaccurate. You also said that he has a projection of profits over the first 6-9 months and then later you say his projected profits for the first year are £125K .

I'm just concerned that you haven't looked into this thoroughly and asked the sort of probing questions that people on here are coming up with. That may be, of course, because he is your stepson. Naturally, you want to help him but I feel that you need, for both your sakes, to look at this in a dispassionate way and satisfy yourself that this is a viable business and, for you, a sound investment. I don't doubt that he is an excellent mechanic but is he a good businessman? 

I realise that it might be difficult for you to do a thorough analysis of his business plan and to test whether he has the skills and knowledge to run a business as this might suggest a lack of trust and cause bad feeling between you, which naturally you want to avoid.  If you don't though and things don't work out are you willing and able to stand a total loss of your £20K if the worst should happen, and how would this affect your relationship?

Best of luck to you both, whatever you decide to do.