S.Horton wrote in post #13647170
Don't do it. Money changes everything.
And if he needs your money for working capital, which in his business is called a floorplan lease, then that means he cannot get it from any bank. 25% is huge.
If you do this, then pay an attorney for a very strong agreement. In a nutshell, your investment requires collateral, specifically ownership interest in all of his net assets, and a term. On the term, make sure that he is required to keep your money at work for a minimum period of time, and guarantee a minimum return.
If he is as you say, he will have no problem with that.
By the way, people with a lot to lose have a high motivation to lie. It could well be he's about to go out of business. That would explain the extremely high rate of return.
How can you say that 25% is huge, when we haven't seen any figures?
If the friend is selling an occasional car from his house and wants a $100,000 loan, 25% is nothing and it will take forever to make a return. If the guy has a car dealership turning over several cars a week and wants to borrow $10,000 then 25% is huge.
Seriously, spb, you ask us if 25% is reasonable but give us no idea of figures, so how can we possibly give a sensible answer. The only way to answer that would be to look at his books and see what profit he is making and know how much you are looking to invest. Then compare the projected return against the investment.
Personally, I would be very wary of doing casual business like this with a friend. I appreciate that you trust the guy, and that he is probably sure that things will go well, but that doesn't mean that they will. You say that you can get the money back if requested, but he has probably been turned down by the banks etc. if he is making such an offer to you. So where would he get the money from, to pay you back? He would have to borrow it from somebody else as an "investment". Can you be sure that he isn't needing this money to pay off a previous investor who hasn't seen much return? In which case, the business is failing and your money isn't going to help it any, simply be passed on to someone else.
If he can't expand the business from profits, it is just getting by. Making enough to stay in business but nothing more. Your money may help him expand a little, but if he then has to hand over 25% of that profit then the business is going to struggle. He may be convinced that he can make it work. but these days no business is certain.
You are also unclear about the way the return works. You say " 25% of the profit of the sales that are made with the money I invest ". Does that mean 25% gross or net? (i.e. if he sells a car for $500 more than it cost him, do you get $125 or does he deduct a share of all his bills). More importantly, is he specifically using your money to buy a couple of used cars, to sit alongside the ones he has bought already and will just give you 25% of the profit on those cars (he didn't say 25% of sales, he specified those made with your money). If that is the case, how is he accounting, further down the line, which are "your" cars and which are not. If he has a car lot, then I doubt he could take your investment to buy in a bit more stock, but give you 25% on all sales without losing money - particularly as the fact he needs this money suggests profits are already marginal. If he can afford to hand over 25%, he could use that to build the stock up without your help.
I get the impression that he doesn't have a proper car lot, but is selling cars from home ? Buying one or two here and there and selling them on, using the money to buy the next ones. It is a risky game (I've done it) and whilst you can make good money on some cars, there are others that come back to bite you. I assume that where you are there are consumer protection laws that state goods must be suitable for use? In essence, it is all very well saying "sold as seen", but if the engine siezes the next day, or the customer finds a serious defect, you are still liable. In the UK, by law, any car sold by a business (even a small one selling odd cars from home) must be fully roadworthy, if he misses something and a car has a brake problem develop on the road causing an accident, then he is in for a mess of legal troubles. As an investor, you could potentially be sued as well. If you only get the 25% on cars bought with "your money", when does he decide which they are? Does he just go out with your money and buy a couple, or is he buying them alongside the ones he would be buying anyway, to replace stock? Does he allocate them to you when he hands over the cash, or once he has got them back to base and given them the once over? Does he decide to keep the ones that should make most profit for himself, and give you the ones that might not make as much, or could potentially be the ones that have a major problem that turns into a big loss? If one does make a loss, does that then have to be covered by the profit from your other cars in future.
There are too many red flags here, that could easily turn into a total loss situation. So, are you prepared to lose your money if it all goes wrong? I know you trust him, but he could be trying to bail out his business and be sure that it will work - the same way a gambler places one more bet, as he is sure that it will be the one that gets him out of debt.
More importantly, are you prepared to lose your friend? Countless "best friend forever" relationships have turned sour, when money becomes involved and things go wrong.
You need to clarify the situation of the 25%, and get a contract drawn up to protect you (don't ask him for one, you get one made by your lawyer, if he doesn't like it, he can find another investor). Go over the books, and calculate what the 25% is likely to translate into in real terms, so you can judge the real return against the amount you are investing. If he is offering 25% net, and the business is only breaking even, after paying his salary and other expenses, then you will get 25% of nothing, which is still nothing. If that is the case, you may want to specify 25% gross instead (although I doubt he would go for that, as it would probably put the business into a loss situation overall).
As for taxes, see an accountant. In fact, go see one with the books, and the whole deal, before agreeing to anything. Some people worry about the cost of paying an accountant, a good accountant costs nothing, they will save you more than you have to pay them.