Q&A Should I invest in a family business? What happens if it fails?

Q:      My daughter and her husband are starting their own business and want me to invest in it rather than them take a bank loan. I do have spare capital as my husband died in 2020 and left me well cared for. However, in today’s uncertain financial climate, I am worried what will happen if the business fails. Would I be a creditor?

A:       There are always substantial risks to investing in a start-up business, and those risks need to be made clear at the outset. There are also different ways to invest in your daughter’s business.

Firstly, you could invest and become a shareholder, which means if the business became profitable you would receive a share of the profits. However, if the business failed your shares would lose value, and whatever that value was would be what you would get back in the form of your percentage share. At worst there would be no money left, in which case you would lose all the money you invested.

The other option would be to loan the required money to your daughter and her husband, in which case you would become a creditor if the business became insolvent, and the loan would become a debt. If you have other children, for the sake of fairness you could have the loan offset against the borrowing child’s inheritance in your Will.

Whichever investment route you take you should seek legal advice and get a written agreement drawn up, which includes an agreed rate of return on your investment if you decide on the loan option. There are also tax implications applicable in both cases, which your legal adviser will be able to go through with you. It is essential that you fully understand them. In addition, you need to make sure your daughter and her husband have a proper business plan in place which you can show to your solicitor.

This question has been answered by Robert Williams, a Partner with GHP Legal.  If you would like to speak to someone about this or any other legal matter it is still possible, and we are doing everything we can to ensure that we continue to offer our high levels of service to our clients.  Where possible, we ask that you communicate with us by phone or email. If you have a new enquiry or for an appointment visit www.ghplegal.com or contact one of our offices: Wrexham 01978 291456, Llangollen 01978 860313, Oswestry 01691 659194 

Robert Williams

Robert Williams

Partner and Complaints Handler

Partner and Head of the Civil Litigation, Personal Injury and Dispute Resolution team in Wrexham