That includes considering three M's: motivation, money, and mentoring.
* Motivation. To succeed,
your child must be motivated. He or she may like the idea of self-employment
but lose interest when confronted with the realities of planning and
preparation.
Before involving yourself, find out how much time, thought, and effort
your child has already devoted to the proposed business. If the enterprise is
no more than an idea, you can suggest approaches to researching the market and
determining the resources, knowledge, and skills that will be needed. However,
your input should be limited to guidance and ideas. Your child should do the
work.
Once your child has completed the necessary groundwork, and if the
project still seems reasonably feasible, you'll be ready to consider the next
steps.
* Money. Whether you're
making a loan or buying an ownership interest, never put up more money than you
can comfortably afford to lose. Try not to be the sole source of capital. Risk
is part of the business experience, and your child should have some personal
assets at stake. Although loans from outside sources may also be part of the mix,
they should be limited in order to keep the debt service from becoming
overwhelming.
Set limits. Make it clear that you'll lend or invest a specific amount
and no more. You also may wish to set restrictions on the use of the funds
within the business.
Put everything in writing. Loans should be supported by signed notes
that stipulate repayment terms and require interest at market rates.
Investments should be supported by partnership agreements, shareholder
agreements, or similar documents that describe operating arrangements, profit
and loss sharing, buyout provisions, and closing contingencies.
Don't forget tax planning. You probably will want to allocate any
taxable income to your child, and you certainly will want to be able to write
off your loss if the business goes bad. Proper documentation will be paramount,
since the IRS closely scrutinizes family transactions.
* Mentoring. Remember that
the primary objective is to give your child business experience. Explain the
reasons behind each of your requirements, and make it clear that the child must
consider your input as a condition of accepting your money. You should offer
advice freely, but let your child make most of the business decisions. Mistakes
are part of the learning process.
If you're thinking about
helping your child get started in a business, give us a call at (518) 798-3330. We'll be glad to
offer guidelines to fit your particular circumstances.
