Author Topic: Should I Invest In This Company?  (Read 1986 times)

JGB

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Should I Invest In This Company?
« on: June 13, 2014, 10:03:15 AM »
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?

MDM

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Re: Should I Invest In This Company?
« Reply #1 on: June 13, 2014, 10:15:45 AM »
Reminds me of this passage from James Clavell's Noble House: "When Dunross was on his school holidays his father would send him to work for certain old friends. Tightfist Tung had been one of them and Dunross remembered the hideous summer he had spent sweating in the filthy basement of the syndicate bank in Macao, trying to please his mentor and not to weep with rage at the thought of what he had to endure while all his friends were out playing. But now he was glad for that summer. Tightfist had taught him much about money-the value of it, how to make it, hold on to it, about usury, greed and the normal Chinese lending rate, in good times, of 2 percent a month.

"Take twice as much collateral as you need but if he has none then look at the eyes of the borrower!" Tightfist would scream at him. "No collateral, then of course charge a bigger interest. Now think, can you trust him? Can he repay the money? Is he a worker or a drone? Look at him, fool, he's your collateral! How much of my hard-earned money does he want? Is he a hard worker? If he is, what's 2 percent a month to him-or 4? Nothing. But it's my money that'll make the fornicator rich if it's his joss to be rich. The man himselfs all the collateral you ever need! Lend a rich man's son anything if he's borrowing against his heritage and you have the father's chop-it'll all be thrown away on singsong girls but never mind, it's his money not yours! How do you become rich? You save! You save money, buy land with one third, lend one third and keep one third in cash. Lend only to civilized persons and never trust a quai loh..." he would cackle."

rmendpara

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Re: Should I Invest In This Company?
« Reply #2 on: June 13, 2014, 11:44:06 AM »
Lol, I like the passage above from MDM.

In any case, it's a speculative investment. The numbers alone suggest it is riskier than the stock market, thus, your expected return should probably have >10% expected return assuming everything gets paid back.

Regardless of how you structure the deal, it really depends on your security interest. Do you have a lien against some sort of valuable property or claim against the assets in some way? A claim against an illiquid asset will be basically useless.

Since he seems to pay back his debts, but just not on a set schedule, maybe just offer him an unsecured loan (a secured loan is pointless unless you're willing to sue to get your money back/liquidate the collateral) at a commensurate interest rate. Does the $10k represent <5% of your NW? Ideally, even less than that.

The loan itself isn't the problem, it's more of whether or not your portfolio can handle the risk.

JGB

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Re: Should I Invest In This Company?
« Reply #3 on: June 13, 2014, 11:55:17 AM »
Do you have a lien against some sort of valuable property or claim against the assets in some way? A claim against an illiquid asset will be basically useless.
I don't expect there to be a lien of any sort involved. I could potentially work something like that into the terms, but I am not sure what he would be able to offer as an asset to satisfy this.

Since he seems to pay back his debts, but just not on a set schedule, maybe just offer him an unsecured loan (a secured loan is pointless unless you're willing to sue to get your money back/liquidate the collateral) at a commensurate interest rate.
In the end, that's sort of how I am looking at this - as an unsecured loan with an open-ended time-frame for payoff and payments that come in monthly along the way.

Does the $10k represent <5% of your NW? Ideally, even less than that. The loan itself isn't the problem, it's more of whether or not your portfolio can handle the risk.
$10k is significantly under 5% of my NW. It's about 8% of my current liquid assets (counting my taxable Vanguard fund), and about half of my available cash.