Everyone wants to help their children succeed. Many believe the best path for them is the same path they chose-Entrepreneurship. Before you help your children buy or start a business let’s look at some caveats:
Can you afford it? The $200,000 that you are loaning to your kids (make it a formal loan, with loan docs, interest rate, amortization schedule, UCC filing, etc.), can you afford the loss if none of it ever comes back? The odds are pretty high that their or anybody else’s start-up will fail. If the loss of the money will jeopardize your retirement or lifestyle-Don’t do it! Also, there are tax ramifications that need to be addressed before making the loan.
Do they have what it takes? As an Entrepreneur, you probably started out on a shoestring, clawed your way up, lived frugally and deferred a great deal of personal gratification. How about your kid’s? Have they only known an easier life and take your sacrifices for granted? Not everyone is cut out to be a business owner and make payroll with a Visa advance.
What is their skill set? What do they know about the restaurant, car wash or cleaning business? What is their educational and working background? Can they read a Balance Sheet or Income Statement? Can they close the sale with a critical, must-have prospect? You love your kids, but a greater love is not setting them up to fail.
Is it the right business or the right business for them? Why will banks lend to almost anyone to buy a reputable franchise, even if the buyer/borrower has no industry experience? A franchise gives them a proven system and business model as a security blanket. On the other hand, for someone to get an SBA-insured loan to purchase an independent, non-franchise business, the lender will weigh experience in the industry heavier than the borrower’s personal credit.
Also, a wonderful franchise in a lousy location makes for a failing business. Many name retail franchisee locations are struggling mightily in this tough economic environment. Prepare yourself and your child to spend considerable time and monies on due diligence above and beyond the initial investment.
Your children may do wonderful things with the money you lend them, but forewarned is forearmed and much family grief can be eliminated with some proper planning and review. Remember, a greater love is not to set up your children to fail.