Dad…Mom… I Need Your Help

MONEY SAVER

If your son or daughter approaches you
for a loan to start a business, make sure
they have a solid business plan.

It has always been difficult for young people to start
their working lives. The traditional route has been
to apply along with hundreds or perhaps thousands
of other equally well-educated people for advertised
positions. But many young people, even those with
post-secondary education, are unable to find work and
believe the only course of action is to start their own
business.

Even though they are well educated in their chosen
field and perhaps have studied accounting, marketing
and other subjects essential to running a business,
they are not necessarily experienced with the pragmatics
of a business venture.

Turning to the Parent

Your offspring has finished their formal training and
has come to you with an idea for a business. You want
to help but you are also an owner-manager who knows
how hard it is to start and grow a successful business.
You don’t want to say “no” but you are not prepared
to say “yes” yet either. So, maybe a little role playing
would help get the two of you to a decision.

Get a Business Plan

Pretend you are the loans officer of a bank and have
your son or daughter pretend they are the small-business
person approaching the bank with an idea. Your
question, of course, is the same as the bank’s: “Will I
get my money back if I risk it with you?” To find the
answer, the bank would ask for a business plan. You
should too. If your offspring hasn’t already prepared
a business plan, this is the time to get some experience.
Tell them there’s plenty of help available online
from the Business Development Bank of Canada, the
chartered banks and, of course, in the bookstores.

Check the Industry Canada website
for important statistics.

A Reality Check

Make sure they read the latest edition of the Industry
Canada annual publication Key Small Business Statistics.
The Key defines a small business as an incorporated
business with one-to-99 employees that has remitted
payroll deductions for at least one employee, has sales
revenue of $30,000 or more and has filed federal corporate
tax at least once in the previous three years.
This publication is a reality check on survival rates,
education levels of owners and many other facts
that define small business ownership. The Industry
Canada website is also an important source of useful
benchmarking statistics that will give your young
entrepreneur an idea of the way industries actually
perform as measured by revenue, expenses and net
profit/loss.

From a Business Perspective

As a prudent investor, you will want to see the following
in the business plan:

• What is the product or service?
• Is there a market for it and who are the competitors?
• Does your child have the relevant education and other competencies?
• What assumptions are made about the economy,
  the industry, the market and interest rates for the
  first five years of the business?
• Have sales, cash flow and profit projections been prepared for the next five years? Are the projections reasonable in light of the assumptions?
• Are there other partners or shareholders contributing
  capital?
• Have their backgrounds been checked?
• What will they do and do they have the requisite
  skills?
• What are the terms of the shareholders’ agreement?
• Who has decision-making and signing authority?
• How long will it take for the company to break even?
• What is the anticipated rate of return compared to
  a risk-free investment?
• Will there be any lenders ahead of you?
• Is the loan insured against the death of the
  borrower(s)?

Your Investment Risks

• What security is available for you in the event the
  business fails?
• How long will it be before the principal amount
  is repaid?
• Is the proposed return on investment from the
  business equal to or greater than the current rate
  of return on your existing portfolio?

Think of the Long-Term Impact

Don’t make the loan for emotional reasons. Your
offspring will have other opportunities; you may not.
The older you are the less time and opportunity you
have for financial recovery if your son’s or daughter’s
company fails. You could end up with insufficient
funds to live through your senior years. If the business
fails and funds are lost are all parties aware of the
emotional tsunami that may engulf the family? Have
you discussed with other family members whether the
outstanding loan will be deducted from the entrepreneurial
child’s share in the distribution of assets upon
your death?

Have the business plan reviewed by professionals
before committing your funds. Better to spend a couple
of thousand dollars at the front end for professional
guidance from accountants, lawyers, and investment
advisors than it is to lose $200,000 when the business
goes south for lack of due diligence.

And Finally…

Make it very clear to the adult child that business
is business and family is family. When it comes to
business, expect them to meet the conditions of
agreements. If they do not, you will pursue available
remedies in your own interest.