Q. I’m thinking of starting a business with my brother-in-law, but we don’t always get along. We would have to borrow some money to get started. What are the pros and cons?
— Almost ready to jump
A. We love to hear about new ventures, but you’re right to be concerned. You’re going to have to juggle having a financial deal with a family member, possibly linking your own credit to your brother-in-law’s, and that can get ugly if things go wrong. (Editor’s Note: You can see where your personal credit currently stands by pulling your credit reports for free each year on AnnualCreditReport.com and viewing your credit scores for free each month on Credit.com.)
Starting a business with someone is a lot like getting married, said Eric Furey, a certified financial planner with RegentAtlantic Capital in Morristown, N.J.
He said regardless of whether your business partner is family, a close friend or maybe a colleague from another job, you need to ask yourself if you’re comfortable being with this person through thick and thin.
Furey said people go into business with the best intentions. They’ll divide up the responsibilities of the business so maybe one person focuses on operations while the other focuses on business development and driving revenue.
“In a perfect world, the two roles complement one another, the business is successful, and the partners get to split the fruit of their efforts,” he said. “The reality with most small business is that they are not successful, and regardless of one’s role in the business, the liabilities of the business are assumed by each of the partners.”
There are a few ways to raise money for the business.
The first, Furey said, is for you and your partner to put your own capital at risk, and the capital you commit represents your ownership in the business.
For example, if you need $100,000 and each of you puts in $50,000, then you each have a 50% interest in the business.
The second way is to have outside investors put in capital in exchange for an equity ownership, Furey said.
“The drawback is that if the business is successful then that investor will always receive a portion of your profits and may have a say in how you operate the business,” he said.
Lastly, you can use traditional lending whereby a lender gives you money, charges an interest rate, and you pay the funds back over time, Furey said. The lender’s only source of compensation is the interest that they charge and paying back that money is the obligation of you and your partner.
It sounds as if that’s the scenario you’re considering, so then you need to be comfortable and confident in the person you’re going into business with.
“Even if you uphold your end of the partnership, the failure of the business is shared between you and your partner,” Furey said. “The eyes of the lender will not see and place blame on the underperforming partner. Lenders will hold the business as an entity, to which you are a joint owner, accountable.”
If you do start this family business, make sure you’re both in it for the long term, and be sure to consider succession planning issues.
Good luck with this one — and consider saving your receipts.
More Money-Saving Reads:
The post I Want to Start a Business With My Brother-in-Law. Bad Idea? appeared first on Credit.com.