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Should my Parents Invest in my Cousin's Business Idea?

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jesseissorude

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Putting this in "Investing" even though I think it could also fit in "People & Relationships."

My cousin is a pharmacist of 20 years and has invented a doodad that makes dispensing prescriptions easier. She's asking my parents to invest in her idea.

My parents are wealthy (they've just retired and have $1M in a 401k and a sizeable inheritance they just received from my grandparents' real-estate trust). They just called me and asked me to come watch my cousin's Zoom pitch on her business idea to them. I'm not sure of the amount she'll be asking for yet.

My questions:
  • Is this a good idea? Could this stress my parents' relationship with my cousin?
  • What due diligence / questions should I suggest they get before investing?
  • Should she go to a bank for an investment first, and then just turn around with the offer and see if my parents can give her slightly better terms?
  • Is there an upper-limit amount they shouldn't invest over?
Neither I, nor my parents have been in this position before. I've invested a very small amount ($5k) in a new local music store with an agreement to have it paid off with interest over the course of 3 years (it worked out great and the store is thriving 6 years later)... but that extremely small deal is my only reference point.

Thanks!!
 

Martzee

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This is definitely a tough moment. Although many websites advise on raising money through a family, it can for sure ruin your family relationship.

Here are my inputs on your questions:

  • Is this a good idea? Could this stress my parents' relationship with my cousin? Yes, it could stress your parents and their relationship with your cousin. They should talk to her about her business and discuss what would happen if things won't go the way she is envisioning. And your parents should treat the money they lend her as already lost and unavailable. That way they will not be anxious about the money. And then, ask your cousin to write a detailed contract describing what would happen with the money (also define whether it is a loan or investment as the loan needs to be repaid but the investment can be lost).
  • What due diligence / questions should I suggest they get before investing? This is hard to say since I personally have no knowledge about the product, so I would ask about the product, current sales, future goals, maybe also review the clients' reactions, who are the clients, is the product a consumable one or you buy it once and done for the rest of your life? But definitely, review the current sales, cost to manufacture the product and that will tell you whether the business model is feasible or not. If the numbers do not add up, then walk away. If there are no numbers at all "because it will all start once I get the money" then it is all dreams and walk away too.
  • Should she go to a bank for an investment first, and then just turn around with the offer and see if my parents can give her slightly better terms? That is not a bad idea to do. If she can convince a bank that the business proposal is a good idea, then it can give your parents peace of mind that she did good work on the business and securing a loan from a bank. Then they can give her better terms. But again, define whether it is a loan or investment. These are treated differently.
  • Is there an upper-limit amount they shouldn't invest over? Use the Buffett formula. Warren Buffett wants to invest in companies that make revenue and you shouldn't invest more than 10 times that revenue (discounted). But it also depends on how long they want to be invested. If only 3 years, then 10 times the revenue wouldn't work and put a lot of stress on both parties. If it is a loan, define how much she can pay monthly back, how long, and that can give you an idea of how much you can lend out. So, again, define whether it is a loan or investment.
 

jesseissorude

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And your parents should treat the money they lend her as already lost and unavailable.

100%, that's what I plan to go in and tell them when I see them later.

And then, ask your cousin to write a detailed contract describing what would happen with the money (also define whether it is a loan or investment as the loan needs to be repaid but the investment can be lost).

Love it, thank you!

Should she go to a bank for an investment first, and then just turn around with the offer and see if my parents can give her slightly better terms? That is not a bad idea to do. If she can convince a bank that the business proposal is a good idea, then it can give your parents peace of mind that she did good work on the business and securing a loan from a bank. Then they can give her better terms.

That's what I figured. Get a bank to vet it for us... after all, the best way to raise money is to not need it in the first place.
If I was asking my parents for an investment in my current company, I'd shop around to banks, then give the terms to my parents. Ask for an advance on my inheritance (hah!)
I'll be curious to see if my cousin has sought any other sources of funding yet.

Is there an upper-limit amount they shouldn't invest over? Use the Buffett formula...[]

Of course! I don't know why I didn't think about that.

Thank you so much for the help
 

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