Investing in a Relative’s Business is Risky

In tough economic times such as these, there’s certainly no shortage of sufferers. Those fortunate enough to have staved off the symptoms of the recession are almost invariably …

In tough economic times such as these, there’s certainly no shortage of sufferers. Those fortunate enough to have staved off the symptoms of the recession are almost invariably left with a few family members who aren’t so lucky, and an unshakable desire to do something about it. We love our family and want to do the best things for them, and help should always be made available on a reasonable level. But when it comes to investing in the business ideas that our loved ones come up with, there’s more at play than just an urge to do what’s best for someone we care about. Our financial good name is put on the line, not to mention scores of cash. Simply put, such business arrangements are risky for several reasons:

Their Imagination Ignites Yours

We want our family to succeed. We want that to happen so much that we’re willing to project all sorts of potential into the bodies and minds of those we love. That’s why every parent will tell you their kid has the potential to grow up to become an astronaut. They don’t just say that – parents will truly believe their kids are superhuman. The minute percentage of actual astronauts in the world indicates most parents are incorrect in their assessment of their child’s abilities.

The same is true of parents being pitched a business idea by their grown-up children. If the idea isn’t flat-out ridiculous, we immediately say to ourselves, “This could work!” The pitfalls of their ideas are ignored, which in any other situation would be immediately picked up on and poked at by your better business senses. Their inability to find success elsewhere, your desire to see your kid succeed, and an overall failure to look at the situation objectivity all contribute to your decision to put massive amounts of retirement savings or other capital into their otherwise questionable plans.

This has been recently demonstrated in the drama surrounding Governor Nathan Deal of Georgia’s plans for reelection. His fiscal responsibility and business sense have come into question after it was discovered that he bankrolled a failed multimillion dollar sporting goods business built by his daughter and son-in-law. The failure resulted in his children filing for bankruptcy, and the Governor is currently in the process of making sure the same thing doesn’t happen to him.

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It’s Almost Impossible to Say No

As Ron Leiber’s New York Times editorial on the subject recently pointed out, Deal’s defense for the mistake is consistently that “Parents help their children.” Whether a politically savvy excuse or not, it’s an otherwise true sentiment when applied to the overwhelming majority of parents who want to invest in the business ideas of their children. This takes shape in the main focus of Leiber’s article, which is that parents are increasingly engaging in such business behavior to help struggling children out, only to pay for it dearly later.

But it’s not just a problem between parents and their adult children. Any situation where someone you love is approaching you with a business proposition they obviously poured their heart and soul into is a tough one to get out of without risking your assets or breaking their heart. Saying no only to see them turn around and chase their dreams through credit cards, auto title loans, or other high-interest sources can easily press the right sequence of triggers that tug tightly on your heart strings. You end up giving in simply out of sympathy. Practical business considerations go out the window.

Saying Yes Requires Specific Conditions and a Cold Heart

I must be cruel, only to be kind: Thus bad begins and worse remains behind.” – Hamlet

If you invest in the business idea of a loved one, it has to be a no-nonsense affair. Bankruptcy fault must be defined, insurance established, and a contract with definitive language must be written and signed. The idea itself must be scrutinized and all flukes and questions must be addressed and answered before the first business decisions are actually made. Whatever the percentage of the business you bankroll, that’s how much of the decision making should be made with your approval first.

If they don’t agree to these caveats, then you don’t invest in their business. It’s as simple as that.

Otherwise you may be adding yourself to the list of struggling family members.
 

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