Again, great insights!
Seven: this rule is so underrated
Keep your family and business completely separated
Money and blood don't mix like two d!*s and no b!%&h
Find yourself in serious sh!t
True, I would not want to risk family relationships for 150k or any amount. At the end of the day, life really is about the people around you and your relationships and memories.
As to specific investment terms like amounts, splits and percentages I can't offer an opinion that would be more informed than yours. Only you know what your investment opportunities are, how this one ranks among them, and what you can negotiate to improve the terms. The more fundamental risk I see is non-performance by the other parties. ¿What leverage, guarantees or remedies do you have if the other parties fail or refuse to perform? Contract clauses with an expectation or hope of judicial enforcement are not sufficient. Unless you have some other practical guarantee you are basically naked.
Just by way of example, a business loan or personal consumer loan here is often guaranteed with real estate by delivering to the lender the actual physical title (along with documentation for ready transfer of title in the event of non-performance), to be held in the lender's physical possession for the life of the loan. This seems drastic and draconian by US standards, but it is standard practice here because without the very real threat of losing their house (or something else of comparably significant value) people regularly don't pay their debts or perform their contractual duties. They will give a hundred reasons why they can't (grandma got sick, baby got sick, I lost my job, my city or neighborhood got flooded, the global Brazil nut market tanked this year, etc., etc., etc.) But unless threatened with something drastic, like losing the only thing of value that they own, people will try to find a way to not pay and not show the least compunction about it. Sorry, it's true, and it is practically in the air they breathe.
Contract terms and courts, in the end, don't mean shit in terms of enforcing performance. So, when I read that you are going to put this and that and the other term in the contract to make sure this or that risk is covered I just shake my head because the documents only merit as much faith as the people who sign them. And in my experience, not much. Sorry, but it's true.
Maybe this is not your issue. Given the family situation, your position within the holding companies, relative sophistication of the parties, etc., maybe this is not a concern for you. If not, then I hope you negotiate the best deal possible and I wish you and all other parties the best of success with the venture.
Most of my family (as do I) have degrees from the US or abroad (so are probably not your typical South American). Non compliance of a contract is something I would not expect from them (not saying it could not happen, especially when any management transition occurs).
As far as real guarantees, you make an excellent point. Since I am the one managing the entire thing however (i get the tenant, I collect and I then pay the 50% to the family company), it is me who would actually have the mayority of operational tasks, to then possibly not comply.
Family business's main commitment, would be to pay out principal if contract breaks before time.
In regards to this I am already leasing 2 retail locations that the family company owns (where I operate two IT retail stores), so a real guarantee would be to stop paying those montly leases (around 2.750 usd total) in exchange for the value owed if or when contract breaks and they do not reimburse the partial principal for some reason.
Finally, I do very much appreciate your success wishes. I also wish you and everyone contributing here, the same.
I'll go a different direction on this. Here's what I see:
-You have a very lucrative job and a lot of assets (we don't know exactly how much, but you've implied that the $150k you'd put into this deal is no big thing, you have other rental properties, and you make $200k a year after taxes so... you're probably pretty much FI right now).
-You stand to inherit a significant portion of the family business (no idea when, right?) which sounds like it is very valuable/lucrative.
I have a hard time, in your shoes, wanting to make a potentially complex investment involving other members of your family when you don't actually need the money for anything. Why take the risk of harming those relationships?
Now, maybe I'm all wrong here and you just started with all this stuff and you have negligible NW. Even in that case, it's hard to imagine that 5 years at your current job wouldn't make you FI (not even counting on the inheritance) just investing in boring/safe stuff that doesn't involve your family.
TL;DR - you won (I think) the game already. Stop playing, especially with your own family.
-W
I love your take on this, because it actually dwells into the question of what really drives us.
I started my first company at 23, right after college, and then another company at 26 (which I sold for a sound profit). I have done well over the past 9 years with a current NW of around 3million with no inheritance received yet. (1.2m in current company, 1m in real estate, .8m in cash, bonds, etc)
However, my personal incentive isn't really to hit a certain money target and be done with it, I actually like the game and very much enjoy starting or buying things and selling them for a profit after adding value.
I also have fun looking for atypical investment oportunities through creativity (I do this a lot in my retail stores), while also being frugal and sound with my expenses (with yearly expenses around 30k, where I am a bit compulsive with tracking everything).
So I guess I am analizing the investment option, because it is what I like to do. I especially like the fact that in this instance, I have the
opportunity to dictate the terms and find a way for it to be profitable for both parties, while trying to safeguard my investment. That to me, is actually very fun! On the contrary, the thought of walking away from this and buying a bond, is not really all that exciting.
I guess if my NW were 5 or 10 times higher, I would be doing the same things I do now (money, work, and leisure wise).
On the family thing, I will actually follow up with another message (this one is getting rather long) in a minute...
I would rather see a 40-year duration loan with a 10 to 18% (fixed or variable) interest rate, recorded in a deed against the land property itself. (This would be entirely repaid in 40 years by the $1,274 to $2,252 monthly payment). The benefit of this, is it becomes a note that you can sell to someone else should you ever need the money, and it solidifies your repayment terms. You don't share in the benefits or downsides of the business other than being repaid for your loan.
If not that, then an agreement where the operation is valued at $500,000 (independent accountant verified), and your 150K buys a 30% stake in the entire thing. No expiration - they would have to buy your percentage out at whatever the company is valued at in 40 years.
I'm seeing a typical lending rate of 18% for Paraguay in 2016. Is this still close? A typical lending rate in the USA is 3.5% to 4%, so your 10% sounds good, but if the typical lending rate is 18% and you're getting 10%, it sounds really bad.
Banks here are very rudimentary, their business is basically making money through the spread between the cost for them to get capital (through CDs, bonds or stocks they issue) and the price at which they borrow this capital.
Yearly averages in Guaranies (local currency), are:
** 9% for deposits (for 5 years, it goes up to about 13%, fixed with no inflation adjustment. So if inflation spikes to 15% for some reason at year 4, you would actually loose principal value in that period)
**up to 30% for borrowing (greatly depends on the borrower, the amount, any colaterals, etc)
Yearly averages in US Dollars , are:
**5% for deposits (for 5 years, it goes up to about 7.5%)
**up to 18% for borrowing (again, depends on borrower)
On the land deed of buying a stake, I am actually thinking about simplyfing the whole thing and try to make it work in 10 years. I will think a little about it, crunch some numbers, and will post it to see what you guys think (taking everyone's advice into consideration).
