Bruce Bachenheimer, clinical professor of management and director of entrepreneurship at Pace’s Lubin School of Business, provides tips to parents who are considering helping an adult child start a business in the November issue of Kiplinger’s Retirement Report.
How much due diligence should the parents do to ensure the business is doable? Should they require a kid to draw up a business and marketing plan? Should any loan be formal with a promissory note, etc.? How often should the parent check in on their investment? Should parents put kids in touch with other experts? How do you stay far enough away so you’re not meddling?
Professor Bachenheimer’s “tips to parents who are considering helping an adult child start a business” are embedded below.
■ Crunch the numbers.
Bachenheimer suggests telling the budding entrepreneur you will invest your $50,000 after he or she finds outside investors willing to put up the other $100,000.
These investors “are going to know what a business plan should look like, what the valuation of the business should be and what the privileges of the investors are,” says Bachenheimer.
■ Write up the terms.
It’s critical to document in writing the terms of your loan or equity investment. At a minimum, your document should spell out the amount being invested, how the funds are to be used and how the parent investor will be repaid. Bachenheimer says you can find sample loan documents on the Internet or seek advice from experts at a small business development center.
“Parents usually have a very valuable amount of social capital,” Bachenheimer says. Your accountant, lawyer, banker, business associates or golf buddies could be potential customers, advisers or investors.