How you can bring other owners or investors into your small business?
If you’ve built up your small business to the point where it needs to expand more, or is organically rapidly growing and up till now you’ve been going it alone, you’ll inevitably need to bring in either more funds from an investor (or borrowings) and likely another human being with skills that can help you cover more ground. Let’s face it, there are only so many hours in a day.
I’m going to start with the bad here (insert frowny face), but 100% of business partnerships will fail at some point. Long-time friends or even married couples will eventually need to split their business ways, usually over money, but commonly also over life changes. This is fine to happen, just make sure you have written agreements from day dot. You need exit strategy advice on this, but we’re not focussing on that here. I’m going to give you some insights on the possible ways to bring in business partners based on your structure and needs. You can then use that to consider what would go into a partner, investor or heads of agreement contract.
So we’ve got the four main structure types that I’m always banging on about, sole trader, partnership, trust and company. And we need to also consider within each are we bringing in an investor for extra cash, or a business partner to provide more human resources.
Firstly with a sole trader, you are inherently just you. You can’t bring in another person and stay a sole trader. You could have someone invest in your business, but we really wouldn’t recommend that for risk protection on both sides. So if you’re in this structure and need to bring someone else in, you have to change structure.
A partnership you’d think would be the obvious choice. But if you’re bringing a person in, you’re actually creating a new partnership. It’s a new structure with a new identity from your existing business, or even existing partnership. If it’s only your spouse, fine, that’s generally a good fit as you’re sharing finances legally anyway. We wouldn’t recommend an investment into this structure for same reasons as a sole trader. But if you do go this way for human resources is it best to be a partnership of people? Have you considered a partnership of trusts or companies? For more robust requirements, in certain situations of unrelated people this may be a better solution.
Most small businesses who have or have experienced trusts have a common family discretionary trust. The deed of these generally only includes family members by blood and marriage. So this inherently cuts out the chance of bringing in your friend or other outsider for any equity in the business. If however you have or change to a fixed/unit or hybrid type trust you have a great vehicle for bringing in other unrelated partners. Also if you’re looking for simply an investor, then it is potentially suitable for an investor to lend to your trust with an appropriate loan agreement, although it makes things hard for your investor to get their money back if you default. Commonly a personal guarantee is required which really just re-routes the trust’s risk protection. It’s a tricky round-a-bout you both need to be advised on.
Probably in most cases the best vehicle for bringing in multiple investors or owners is a company. This is because we can define the directors who run it, and the shareholders who own it in varying proportions, and apply if required differing rights to these roles. It’s also a robust structure for lending to, as it’s a legal entity that can be sued for default, if you happen to be that unlucky investor. Corporate law also has enactments for minority shareholders and creditor rights from the side of what would be the investor, so they may be more comfortable coming into your business or lending you that money to actually get the deal done.
Every business and situation is however unique and so getting advice on your options and then perhaps the best one from a worldly business advisor who’ll look at both sides of the coin is always recommended.
Dean Milner | Startusup™ Technical Talent