As a parent, you want to see your kids succeed. You understand what it is like to be young, full of energy, and bursting with ideas. So when your kids come to you with a business idea and they are looking for startup capital, you may jump in without carefully weighing the risks of investing in your child’s business. They are your offspring after all, and you know that they will have it in them to succeed no matter what the odds are.
This is probably what went through the mind of Georgia governor Nathan Deal a few years ago. His daughter came to him with the exciting opportunity of investing in the sporting goods store she and her husband wanted to open. In the spirit of making sure his children were successful, Deal fronted them the $2M they needed, and cosigned on a loan for as much money. The business did not last long before going under, the kids declared bankruptcy, and Deal not only lost his original $2M investment, he was also on the hook for another $2M in loans to the bank.
If a stranger approached you with a superb business deal, you would most likely turn him away thinking he was crazy. If a friend or an acquaintance came with the same deal, you would scan it, scrutinize, it, think it over, and then make an informed rational decision. However, if your child came to you with the idea, you would often leave your better judgment behind in order to help them. What ends up happening is that you take way more risk than you are comfortable with because you are helping out a family member.
There is nothing wrong with helping your children by investing in your child’s business; they are your family after all. What is wrong is blindly investing in their business without taking the risks into consideration. Just because they are family does not mean they have a fool proof business plan. Before making a rash decision take time to analyze the situation, weigh the risks, and seek outside counsel to determine the viability of the business. You must also take into consideration your risk tolerance. If you are approaching retirement, make sure you can afford to lose your entire investment and still have your living expenses met. And before you pull the trigger ask yourself: am I investing in their business with the expectation that I will get a return on my money? Or am I giving them money to create a job for themselves? Is it an investment or a gift?
If you have the capital to invest in a new business you might as well invest in your family. However, if you are going to invest in a business make sure it is a viable business and your retirement dreams will not be ruined when it fails. Do as much homework as you would for any other investment, and remember that sometimes the best thing you can do for your children is to tell them, “No.” If the business is bound to succeed, it will succeed without your help. If it is going to fail, at least they have their entire life to recoup the losses.