3 Ways to Bring On a Silent Partner
The growth of a business depends upon many factors, the most important of which is the budget. You need a substantial amount of money to ensure constant growth and subsequently retain it.
It is often quite a cumbersome task to find additional capital for your enterprise. You can resolve this problem by bringing more investors to your business.
What kind of investor you would like to take help from?
There are “traditional investors” who lend you money in return for an agreed profit.
But, they also actively participate in routine business activities.
Therefore, you may prefer signing a partnership contract with a “silent partner.”
As the name suggests, this type of investor literally keeps quite. He does not bother spending time with the business owners or helping them run their business, as long as he is getting the profit.
People often hesitate to invest in a business because of the associated risks.
You never know what is going to happen next. You can win a jackpot if the business meets with massive success.
Or, you could lose millions if it is a total failure.
More importantly, why would anybody invest in your business when he has no control over business operations.
Needless to say, it is a very difficult task to find a silent partner.
The person who somehow agrees to become a silent partner deserves special treatment and extra profit.
However, the silent partnership can be a very rewarding business deal. It can offer you a greater profit than stocks, bonds, and mutual funds.
People, in fact, have started to realize the true potential of investing silently in a business.
You may decide against borrowing money from a silent partner, considering the “significant amount of money” you have to pay him in return.
However, you will not have to face problems associated with regular investors in the case of a silent partner.
First of all, you will get the money you need. Secondly, you will be fully in control of your business and answerable to nobody. Thirdly, there will be no unnecessary interference from anyone and you will be free to make decisions as you see fit.
WHO IS A SILENT PARTNER?
A silent partner is an investor who contents on receiving the fixed profit. He does not usually participate in the executive board or investors’ meetings. He has no role to play in the daily operations of the business.
In simple words, the silent partner literally remains silent and does not actively become a part of the company’s management team.
He is also only liable for the money he has provided to the business and nothing more.
Therefore, such a partner is also referred to as a limited partner.
You can always consult a limited partner and seek help whenever necessary. He cannot provide any type of support otherwise solicited.
The guidance and support can include acting as an arbitrator in the case of any conflict between the main business partners and providing crucial business contacts to develop the business.
Limited partners never come to the forefront and always work quietly. They are expected to accept the decisions of the general partners and cede any type of control if they have any.
Similarly, they should also have full confidence in the general partners’ ability to successfully control and grow the enterprise.
It is also their responsibility to determine if all the partners have had compatible corporate vision and management style.
Silent partners are mostly liable for two things.
The first one is any monetary loss which equals their invested sum of money. Secondly, they are also liable for any role or responsibility they might have assumed during the process of launching a business.
Both these things make limited partnership one of the most favorable and profitable types of investment.
You literally have to do nothing. You are not liable for anything either, but you still have a sizable stake in a growing business.
The Secret Partners?
The identity of a silent partner is well and truly known to people both inside and outside the organization despite the fact that they don’t have any active role in business undertakings.
On the contrary, no one knows the identity of a secret investor or partner. As a result, he can participate in business operations while maintaining full anonymity.
THE DIFFERENCE BETWEEN THE SILENT PARTNER AND THE INVESTOR
Now it is time to explain the difference between a silent partner and a traditional investor in detail. There are in fact a number of things which distinguish a silent partner from all other types of investors.
These factors may include things like his role in the operations, relation with the business owners, the level of feedback he is entitled to give and the rate of profit.
The following lines elaborate all these points one by one.
Silent Partner Has No Role to Play in Business Operations
The general investor fully participates directly in business operations while the silent one does not. This is also the biggest difference between these two types of investors.
The general investor has a greater role to play in routine business matters and decisions in addition to investing money. A silent partner will only invest money in the business.
He has nothing else to do. He normally does not concern himself with what is going on in the company he has invested in.
It is better for you to look for a traditional investor if you want constant advice and guidance in addition to extra capital.
On the other hand, a silent partner is a better choice if you are already running a successful business, but need more cash to sustain growth.
Traditional investors “expect” you to consult them whenever you have any problem. Similarly, they are always willing to lend their support.
In complete contrast, the silent partner relies on the decisions and management of the existing partners. They minimize their feedback and give no input regarding how to manage the enterprise.
Once again, you should bring a quiet partner if your only goal is acquiring more money for the business, without any extra feedback.
Active investors are a good bet if you want both the money as well as active feedback and advice to attain your next business goal.
Main Difference is Trust
Why would anybody give you a large sum of money without having any say in business decisions?
This will only happen when both of you know and trust each other.
Maybe you already had a great experience working with each other. Maybe he is your intimate friend.
You can also attract more investors to your business if you have recently completed a successful project.
You develop a less formal relationship with a limited partner because you have greater trust in each other.
It will be easier and less frustrating for you to build a company if you manage to find a silent partner right in the beginning.
However, it is easier said than done. While you can find “active” partners without much trouble, it is a challenging task to find a silent one.
Both are Investors
Despite a lot of difference between them, a true silent partner is always an investor. He only wants higher profits compared to traditional investors due to the nature of the partnership.
For instance, a person has to invest a huge amount of money for this type of partnership agreement to work.
Therefore, it is relatively easier to find traditional partners in the current business environment.
An Active Investor Has Greater Liability
Active investors are fully involved in the day to day business affairs and therefore, they have a greater liability than their silent counterparts.
You may consult silent partners for direction and advice from time to time, but they mostly remain out of the picture.
As a result, they are not liable for anything happening inside your company. However, they can agree on a limited-liability partnership.
In this case, they will be protected from all kinds of lawsuits in spite of having a greater influence on the business than the active partners.
Traditional Investors are More Helpful
Traditional investors provide you with valuable advice, guidance, and counsel whenever you have a problem at hand or you want to make a plan for your next move.
Some investors also leverage their own relations and influence in the market to help your business grow and prosper.
In some cases, they pitch in and start working as a full member of your management team. Unfortunately, you cannot receive such type of support from a limited partner.
Specify Roles in the Agreement
You must specify the roles of all types of business investors in the agreement. For instance, you can offer a greater role in the organization to active investors.
The equity structure or the agreement should clearly mention what role you want your partners to play. Do you just need their money or you also need their advice, influence, and contacts?
Different Rates of Profit
It is always a risk to invest in a business, especially when you cannot contribute to business operations and decisions.
It is obvious that a limited investor wants a considerably higher return on his investment because he takes this risk.
On the contrary, a general investor relies on your abilities to generate profit for him after he lends you the money.
Silent Investors are not Readily Available
It is very difficult to find silent partners, to say the least.
They do not exist in the real world unless you can find one within your family, friends or close contacts.
Family members, especially your parents and siblings will continue to love you even if you recklessly waste their money.
However, it also varies from family to family. While extravagant use of money does not bother some families, others are more penny-pinching and hold you accountable for every penny you spend.
Furthermore, you live in a fool’s paradise to think that the silent partners will remain silent. They constantly speak and they have every right to do so.
After all, it is their money you are “squandering.” Therefore, you need to spend the money wisely in order to avoid any conflict with your partners.
HOW TO FIND A SILENT INVESTOR?
How do you convince someone to invest money in your business without having any control over it?
There are only 3 ways to bring a partner without having to face legal problems as well as securities and exchange registration issues of your respective country.
The following is a detailed explanation of each of these methods.
1. Make Him a True Business Partner
Almost all the experts recommend signing a true investor agreement with a limited partner. This type of agreement offers many benefits, including no interference from the SEC.
Similarly, your business partner will have the right to receive profit from you. You can also keep a lot of legal issues at bay.
Most importantly, you will have an experienced partner at your disposal in case you need any help and advice.
There is one major drawback of bringing money partners as general investors. They will exercise greater control over your business.
They will also contribute to business decisions and voting.
You also cannot treat them as a true silent partner. In fact, you should never utter this word in front of them less you want to face their wrath.
You can achieve one objective by treating them as active investors. They cannot complain about anything if something ever goes wrong.
For instance, when you constantly inform them about every business matter and make them a part of the decision-making process, they become equally liable and responsible for any business failure.
This type of agreement has another minor drawback. Since money partners are actively participating in business matters, you have to legitimately address their concerns as well.
The initial agreement of the partnership should clearly state that they are only business partners. They have actual ownership of the business. You are not taking any loan, nor there is any interest rate.
2. Agree on a Fixed Rate of Return
The Lender’s agreement can be extremely beneficial for both parties. Lenders are less likely to lose money if you agree on a fixed profit in the contract.
Similarly, you do not have to follow their instructions and advice, address their concerns and redress their grievances if you bring them as a lender only.
The lender’s agreement is the ideal choice if you do not want to get into any legal trouble, but also need a limited partner for your business.
But, they must agree on a fixed rate of return without raising any hue and cry.
If there is no legal way for a lender to earn profit from your business, he can register a claim with the SEC, the very issue you wanted to avoid in the first place if you somehow lose his money.
You can unintentionally transform limited partners to active business partners as well.
In this case, they will share full responsibility and liability in addition to taking an active part in routine business affairs.
However, your creditors can contact them directly to retrieve their money if they get the wind of your partnership.
It is always imperative to write a solid promissory note before engaging yourself in any such partnership.
The promissory note should always contain the following terms.
- Clearly mention the party lending the money and the party responsible to pay it back.
- The total amount of money loaned and the interest rate.
- When and how you are paying the loan back?
- Is there any penalty for repaying the loan before time?
- The penalty or consequences if the second party defaults or struggles to pay the loan back.
3. Documenting an Investor Deal with the Securities and Exchange Commission
Signing a lender agreement is one of the best options if you only want to receive financial help from someone.
However, many investors ask much more than just a fixed rate of return.
They hate indulging in hectic business activities, yet they want to share the profits.
In simple words, they demand an equity position in the business. If you come across any such money lender, it is imperative for you to document a proper investment deal with the SEC.
If you are going to sign an investor deal with any party or person, you need to take care of the following things.
Always hire an experienced security attorney who knows all the ins and outs of the process.
A highly qualified security attorney with years of professional experience will help you choose the best possible investment option for your business as well.
It is also important for you to file a Form D with the Securities and Exchange Commission. A securities attorney will be a great help in this regard. You also have to file Form D in every state you want to sell the securities.
Also, make sure that you fill and satisfy all the rules and regulations as well as their clauses and sub-clauses. It is literally impossible for a business owner to fully understand the process on his own.
Therefore, you should never take this path without the assistance of an attorney who has all the knowledge and experience of this intricate process.
Against common perception, it is never easy to have a silent partner for your business. You have to meet so many conditions and satisfy so many rules.
Hiring an experienced attorney will also cost you a lot of money. In fact, you have to at least spend $15000 to $20000 before you can get any money from a limited partner.
Keeping all the above factors in mind, you have to decide whether or not you really need a silent partner for your business.
You can go ahead and reach an agreement with a silent partner if you can afford to spend $20000 in terms of attorney’s salary and initial filings.
If not, it is better to bring on a conventional partner to your business.
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