I have a long-term business acquaintance with a gentleman we'll call George. George owns a small-but-growing private investigations business spanning a half-dozen southern states. He is a permanent US resident / legal immigrant and is not planning to become a citizen. Over the past decade, I have watched and occasionally offered minor advice as George transitioned from working as a PI for other companies to going out on his own and starting to build up the company that now employees him and a handful of other PIs.
George has built a reputation for hard work that produces thorough results for his clients. His services are in demand and he gets repeat business and referrals. He has been through down times when business is slow, but things have picked up and he is now turning away jobs due to lacking the labor force and certifications that are required to service some of the states in which his clients do business.
Today, George approached me asking for an investment in his company. He is currently looking for $10k in order to hire new PIs (their actual salary will come as a percentage of the work they do), pay for training & certifications, and to increase insurance coverages to cover the next tier of number of employees.
George has left the terms of the investment up to me. Basically, he wants to know what I would require in order to do the deal. Then he'll probably agree and/or come up with a counter offer. He specifically mentioned residual income as the primary means to which he thinks this will go, but I can ultimately structure the terms however I see fit.
I have operated my own small business on the side for several years, and have previously been a partner in another. The later experience soured me on the whole entrepreneur idea quite a bit. Ultimately, I am not very interested in owning a piece of his PI firm. But I am interested in the potential to make money here...
I should also make a few notes about George and my history with him. First, George is fairly short-sited with money. He has mediocre credit. For nearly the vast majority of the 15 years we have known each other, George has owed me money. He currently owes me $4600 from a loan agreement we reached in April. That sounds bad, but the reason he has owed me money for so much of this time is that he continually comes to me to borrow more money, typically within 6 months of the payoff for the last loan. He always pays off the loans we have made, with interest and late fees that make it worth my while (ex. the terms he proposed for our last loan were 30% APY + $50 late fee assessed for each month he failed to pay on time).
My initial thought when he asked about this investment was a quick "no." Like most here, I'm predominantly an index-fund investor. When I dabble in individual equities, I keep my exposure with each individual company below $5k. That's with largely profitable, well-established companies. A $10k exposure in a small business is not something I'm interested in.
But the possibility of naming my own terms has me intrigued. I feel like there is probably a way to structure this deal such that I am sufficiently protected and rewarded. For instance, one thing I am considering proposing is a deal that I would get a payment of 2% per month for the duration of time that I have money invested, with a clause allowing him to pay back the amount on whatever schedule he chooses. I would also include a clause that I could request payback at any point after a set amount of time, resulting in $1k per month paid back on top of the 2%. And a clause that should the business fail, he is still on the hook to pay back the principle amount within one year.
The upside is a potential 25% return. The downside, of course, is the risk. I do feel that risk is mitigated from the way George has fullfilled all expectations over the 15 years we have known each other.
So, what do you think? Is it worth it to move forward? Are there other clauses that I should include in the agreement? Are there other terms that would be better?