My sister-in-law (wife's brother's wife) runs a very small bakery operation out of my mother-in-law's kitchen.  As far as I know, it is a sole proprietorship.  She sells specialty baked goods for everything from kids parties to holidays and weddings.  I don't even like sweets all that much ... but her products are phenomenally good.

She's recently purchased a booth at an enormous semi-annual bridal show in town.  I have no doubt that she'll see massive growth after the first show ... possibly to the extent of catering several weddings a weekend.  I'm not sure how well equipped she is to handle the influx -- at this point, she's a one-woman operation without a commercial kitchen.

I've heard through family that she's having trouble affording some specialty ingredients she needs to buy in bulk from out-of-state.  I haven't seen her books, but I imagine she's probably doing $10K-$15K or so in gross revenue at this point ... but that's just from Facebook and word-of-mouth marketing.  But, that could explode after the bridal show.

I'm considering investing, but I'm not sure the pitfalls here.  I'll admit, most of my small-business investing knowledge comes from Shark Tank and The Profit.  Good shows, but hardly a formal education.  I know $10K in revenue is next-to-nothing, and she's not even paying herself a salary at this point ... so, any profit she's making is counterbalanced by the time she's using.

I wouldn't mind bankrolling some of her bulk ingredient purchases, but I'd want her to understand that this is an investment, not a gift, and that I'd want a return, though certainly not immediately.  I'm not a big enough investor at this point to be able to bankroll bigger issues that may arise -- like eventually needing a commercial kitchen or staff to help cook.  Just some of the smaller stuff.  And, I don't want to be unfair to her, or expect too much.  Just looking for a mutually beneficial arrangement where she gets the cash she needs now, and I get a return on it later.

Any recommendations?  What would be a reasonable return to ask for?  Small percentage ownership, and experience growth after the first big bridal show?  Small passive income stream?  Just a straight payback with a percentage profit added?  Or, should I avoid it altogether?

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A percentage of the company would probably be a good thing to ask, as a gesture of good faith. It may give her a bugger drive to have a successful business as well.

avoid. never mix family and business. 

i was about to add, "unless you are willing to essentially look at it as a gift," which you do not want. pass and invest elsewhere. 

I want to agree with that. The friendship ends were the money starts. What kind of person is she? Could she seperate business and personal stuff? Could you?

I would go for something like a 10-20% ownership, with a profit share that equals your percentage of ownership and maybe a clause for her to buy back the share for $x.

If you really want to go for it, my suggestion would be to talk to her, tell her that you would like to bankroll her, but since it is a investment for you which comes with a risk it needs to pay off. And then you two do the math. If you want a ROI of 10-15% which is  reasonable she has to succeed 9 out of 10 times for you to just break even, she cant half ass it and you arent allowed to bitch around about the money if the business fails.

If her chance of failing is 50% you need a ROI of 100% to break even.

10K is very little. She could probably get that from the bank without having to give them more than a few percentage on interest (and no stake in her business). Also, I agree with others about not mixing business and family. This is a bad situation for the lender as you are probably making a bad investment (since if it was a good one the business owner wouldn't need to resort to family to get capital) and since you can't exactly get mean when the lendee fails to pay back your cash. It is also terrible for the lendee because you have to tread lightly between thanking your lender while at the same time biting your tongue when they wish to use their stake as a reason to tell you how to run your business.

Avoid. The reason is not because it's an in-law. The reasons are:

  • It sounds like you want to be a passive investor. This would not be a good vehicle for that lack of involvement, because then there would not seem to be any mechanisms to protect your interest.
  • You would need some legal framework to protect your interests and your investment, that would create more overhead than it sounds like this business is worth.
  • This would be an extremely unsecured loan.

What would be a reasonable return to ask for?

I'm guessing you mean "consideration" not "return". There is no reasonable return; you assume any and all risk of business failure.

Small percentage ownership

This does not sound like a business with a lot of tangible assets, so what, precisely, would you "own"?

>> Small passive income stream?

She can't guarantee that. To ask for income, you would ask for a percentage ownership with an operating agreement that specifies that you get a proportional percentage of profits. Then you would get income if she makes profits. It would probably be uneven and "subject to market conditions".

Just a straight payback with a percentage profit added?

For all intents and purposes, you would have no way of collecting if things go wrong. If you ever do loan someone money, the contract in question is called a "promissory note"; NB they are "enforceable" in the sense that a judge could order her to pay you, but actually collecting is your own problem.

If you ever do go into business with anyone, you need to structure the business so that your rights and property, as well as the other person's, are protected. Otherwise, her creditors could call YOU a "partner" (specifically, a "general partner") and go after YOU for any debts she incurred, including from litigation. For example, if she catered an event, there was some sort of horrible misunderstanding, the client declared the event "ruined", and sued her...and you.

You would need an operating agreement, and liability protection such as an LLC. I suspect that you would end up being the "limited partner" (meaning, your liability is limited to your investment) and she would be the "managing partner" or "general partner".

This is information, not advice. I am not a lawyer, and I am not giving legal advice. Do your own due diligence.

With those warnings...great success to her!

First of all, and most importantly.. Make sure that she understands that this is NOT a handout, and that you are investing. Never "lend" money to a family member or friend and expect to get it back.

If you decide to go for a larger investment, ask for small ownership in the company. Up to, but no more than 25%. Investing 10-20k for 25% ownership could end up being incredibly profitable in the long run, but it's also risky.

Another thing you could do is invest $5,200, which is about $100/week. You could then ask for a return of $125/week or so. This way, you'd make a little over $1000 profit over the course of the year, without much risk to either you or her. There's all sorts of deals you can work out, just make sure you're not putting too much stress on her, but also that you're getting the a good rate of return!

Once again, things can get sketchy when it comes to money and family/friends. I'd advise starting with a small agreement and going from there to minimize potentially adverse affects.


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