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Consider Carefully Whether to Invest in Child’s Business Venture

| Oct 26, 2010 | Business Formation |

Parents naturally want to help their children succeed, but what if your high hopes for their success lead to financial failure for both parents and children? Late last week, The New York Times published a helpful and informative article for parents who may be considering investing in an adult child’s business venture.

The article came about because Nathan Deal, a Republican running for governor of Georgia, almost faced financial ruin after investing in his daughter and son-in-law’s business that later failed. The author of the Times piece, Ron Lieber, concedes that it would be tempting to invest immediately, but parents must first carefully consider the move from three different perspectives and face some “radical honesty.”

Lieber says that parents should consider the investment from three different perspectives in turn: a financial planner, a venture capitalist and a parent. The financial planner would advise you not to invest more than you can afford to lose.

A parent also needs to look at the child’s business plan with the objective perspective of a venture capitalist. The parent needs to compare the benefits and costs of the business in an honest, realistic way.

Finally, parents should look at the child’s business proposal from the perspective of a parent and be honest about why they are considering the investment. If they are just trying to buy their child a job, they should consider if it is because the child cannot find one on their own. If that is the case, the parent may want to consider safer investments, such as a franchise.

If you do decide as a parent to invest, Lieber advises you to consider your investment a gift, and to make sure it is one you can afford to give.

Source:

Underwriting a Child’s Business Poses Pitfalls for Parents (The New York Times)

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