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Thread started 04 Jan 2012 (Wednesday) 12:29
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Investing money into someone's business.

 
S.Horton
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Jan 05, 2012 12:33 |  #16

Locally, make some calls to find a trial law practice which does business contracts.

That means a firm which has attorneys who know all of the local judges, and who know how to form an iron-clad agreement.

Here's my attorney -- doesn't help you directly, but look what they say --
http://nmmlaw.com/ (external link)

"...solutions to complex matters of commercial law..."

http://nmmlaw.com …eas-of-practice&Itemid=33 (external link)

>> you are looking for a firm with a litigation practice

There is a huge difference between a little local attorney with an office and a litigator. Litigators know how to write agreements which can be quickly and effectively enforced. They have seen all types of fraud, deception, and deceit. That's who you want on your side if there's a fight.

I'm glad you'll consider using one. Even people you have known for >20 years act differently when money is involved.

If they rip you off, their logic will sound good, to them -- something like "my responsibility is to provide for my family first..." and you'll hear it the second they've decided to keep your money to meet that goal.

Money, above all things, changes relationships. At a minimum, this guy who is your 'friend' today will become your debtor; he will owe you money. You would be wise to treat him exactly like that from the moment you write a check until the money, and returns, are in your account.

Good luck.

Keep your wits about you.

I hope you make a lot of money.


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sandpiper
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Jan 05, 2012 13:34 |  #17

S.Horton wrote in post #13647170 (external link)
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.




  
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Daship
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Jan 05, 2012 13:49 |  #18

See you on Judge Judy soon.




  
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S.Horton
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Jan 05, 2012 14:48 |  #19

@sand - I say it is huge because if he's taking 25% of the correctly calculated gross profit on flipping a car bought at auction and sold at retail, and that takes 60 days, plus his principal returned, his effective interest rate has to be in double digits. BUT, that is why I say his legal agreement is key -- there must be a floor rate of return regardless of the business acumen or misfortune of his partner, and there must be a clear-cut calculation of profit sharing. Otherwise, everything could be an unknown.

@das - OP needs a good attorney to avoid a judge or, worst case, to quickly prevail in an action to get his money out. A good attorney will cover these points:
1. Death/disability/depar​ture
2. Timing of payment and exact calculation of the amount owed (e.g. (list price retail - auction price paid) * .25 + principal = payout)
3. Minimum returns
4. Liquidated (pre-agreed) damages for several possible events
5. Mandatory compliance items, for example dealer must pay-out the day a car is sold, all monies, then OP engages in a new transaction for the next flip vs. OP's money just 'gets rolled in' to the next wave of deals (stupid)

This is an interesting subject to me because I actually put together a business plan for a friend (RIP), who was a car dealer, to enter the custom replica manufacturing business two years ago. So, for example, I know what the margin is from auction to flip, including repair/inspection, and the laws about being a dealer, plus the insurance overhead, liability profiles, cost of floorplan lease interest, and a few more things. That is one reason that I'm sure OP could make money, but also sure a lawyer is required and why. In that vein, let me add that floorplan leases, which carry the cost of having a car in inventory, have an effective interest rate close to a credit card, or >20% per year, and the bank literally owns the vehicle while it is in inventory and could repossess it. When the credit crunch hit, many smaller dealers found their revolving arrangements for floorplan leases eliminated, so, again, it is possible OP's friend is profitable and does need working capital. I'd pursue the deal with caution but pursue it for sure.


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Jan 06, 2012 18:02 |  #20

I would think this would be a better question for a qualified professional rather than an online forum. Consult an attorney and possibly a financial adviser. You will also want an accountant to look at his books.


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Jan 06, 2012 18:16 |  #21

rklepper wrote in post #13659799 (external link)
I would think this would be a better question for a qualified professional rather than an online forum. Consult an attorney and possibly a financial adviser. You will also want an accountant to look at his books.

+1.

When you feel ill, do you ask the forum or your doctor? If it's the forum, you're misplacing trust.


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spb
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Jan 06, 2012 20:44 |  #22

When you are ill for the first time and never saw a doctor you cannot help but start asking around. A good advice will point you to a doctor. Which you guys did and i am thankful.

Sam and others, I will see an attorney at the earliest convenience. Found a good firm with some of the key points Sam pointed out. Will be looking for a financial adviser tonight. What is a ballpark cost of their services? I understand it is similar to asking how much is a wedding photographer. But i would still like to have a crude idea.


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S.Horton
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Jan 07, 2012 15:34 |  #23

Attorney $125 to $650 an hour. Former would be a small town associate, latter an NYC top 10 partner. To write the contract like the one you may need, I'd be paying around $2K at $175 per hour.

Financial advisor, I'm not sure what that means in your context.

I assume you mean a CPA to audit your friends books to ensure he's solvent now and not a liar? Your attorney knows who in your area works on that and can recommend someone.

Good luck.


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S.Horton
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Jan 07, 2012 15:50 |  #24

rklepper wrote in post #13659799 (external link)
I would think this would be a better question for a qualified professional rather than an online forum. Consult an attorney and possibly a financial adviser. You will also want an accountant to look at his books.

Here's the catch with that.

There are tons of professionals who will bill you for their advisory services who have absolutely no idea what theyre talking about. So, the best advice he could ever get is how to identify and hire exactly the right people to do the right things.

When I can, I provide that to fulfill a promise to pay it forward.


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ROGERWILCO357
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Jan 10, 2012 17:14 |  #25

I did something similar with my younger brother since he was getting over A messy divorce and needed to get into A new business needed about 25k being the big brother I made the loan on yes his word and handshake, well in short he lost his business went under and found A new love now his new wife and said he was broke but yet still got to have A big wedding and tour France and Italy with his new wife how nice. I have yet to take my wife of 25 plus years out of the State for A vacation boy I still hear about that from my wife ..lol
Well I now consider myself an only child..good luck with your ventures..
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Jan 10, 2012 17:36 |  #26

ROGERWILCO357 wrote in post #13681863 (external link)
I did something similar with my younger brother

Rule no.1 for me when it comes to loaning money to family or friends.
When giving them the cash, call it a loan, but consider it a gift that you have no expectation of getting back. If you can't live with that, don't give them the money.

Going into it that way, if you don't get it back, nothing lost; if you do -- that's money found!


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Jan 10, 2012 17:41 |  #27

This is an incredibly bad idea. You will almost certainly lose a friend. Trust me - been there, done that. It always starts out easy enough and almost always ends with a disaster.




  
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Investing money into someone's business.
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