Entrepreneurship & Small Business

Silent partner in a small business - Pros and Cons ?

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Deal Fanatic
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Jun 28, 2003
9393 posts
2776 upvotes
Ottawa

Silent partner in a small business - Pros and Cons ?

Folks, one of my wife's good friend is planning to open a sushi restaurant (small scale-think maybe 10 tables with take-out) and we would be interested in investing in her business. I myself has a full-time job and my wife is still in school so we won't be running the restaurant, that's for sure. Maybe i will help out on the weekends if needs be but for the sake of arguments, we will call ourselves *silent partners* i.e. providing capital and sharing profits/absorbing losses but not touching the operational side.

My wife's friend knows sushi and everything about it, having been a sushi chef for the past 3 years so we trust her with respect to the daily operations. My question is for silent partners like us, is there anything that we should be aware of, in other words, the pros and the cons. Anything that we should pay close attention to ? esp. this is involving a friend, it's never easy.

Everything is still very preliminary so we haven't decided on how much we should invest and how the profit will be shared but if any of you guys has experience with this, please share your tips and tidbits

Thanks.
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4 replies
Newbie
Jul 26, 2006
20 posts
I don't have any experience in this, but keep in mind the saying that you should not mix friendship with business. With your situation being unique of course, you should still be aware of possible strains on your wife's relationship with her friend, especially if things don't work out.

A disadvantage I could think of is that because you are a silent partner, you won't have any say in day to day operations. Trust issue aside, does she have a proven track record in starting a business? Does she have business smarts? Do you think she has what it takes to make both herself and you guys money? Don't assume that just because you're putting capital into this that she will succeed for the both of you. It's a decisino that you guys should really
think through carefully.
Deal Addict
Mar 15, 2003
1407 posts
16 upvotes
I hate the idea of partnerships. At some point it's going to break down and fail - and then you'll have arguments and issues, you put the money in so you think your opinion should be considered, she's the chef and she'll do it her way, or you don't think she's trying hard enough and the business is struggling and now it's your money going down the crapper, etc.

But nobody wants to listen to that when they start out.

I've had two partnerships (as much as I dread them). One was with someone I didn't really know at the inception. It was very successful by the time we wrapped it up. The absolute key to that was complete seperation of duties. One partner does something, the other partner does something else. And you keep your yapper shut and opinions to yourself on the other partner's duties. Make sure what those duties are to be are laid out clearly ahead of time. In your case, I'd suggest you both make it clear and understood from the get go that you have absolutely no say in the operational aspect - none.

My second partnership was with someone I knew pretty well ahead of time. They left me holding the bag on some debts, basically never heard from them again. And that was with someone I thought was solid at the start and with seperation of duties. So you never know. Be prepared to lose your entire amount of money and your friendship if it ends badly. I suspect 3 years of sushi chef doesn't a succesful restaurant make so you're already entering into a risky endeavour.
Deal Fanatic
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Aug 19, 2001
5086 posts
27 upvotes
Vancouver
I am a silent partner in a restaurant.

Trusting the operational partner to run the business is essential. You have to accept from the very start that she will run it however she wants to, even if it looks wrong to you. Nothing stops you from offering advice, but just remember she is the expert and even if they make mistakes, they're her mistakes to make.

Ensure you discuss and contract the separation terms. What time-range do you plan to be an investor for? How is a buy-out triggered? How is the buy-out amount determined?

Incorporate a company to limit your potential loss. If you must agree to any personal liabilities make sure your partner agrees to them also.

Finally: with your partner running things and you not, there is opportunity for your partner to 'take advantage' of company assets to your financial detriment. (doing her personal drycleaning in the same batch as the uniforms, etc.). This is wrong, and you may be worried about it. But rather than fret about such things which you can't control, you should instead concentrate on the bottom line.... if you are getting the financial return that you expected, despite such possible fraud, then be happy.
Sr. Member
Jan 20, 2004
911 posts
9 upvotes
GTA
It is all about trust. It comes down to how much trust you have, especially when it comes to money.

Also remember, being a silent partner (the keyword being SILENT) literally means just that. To be silent on the operations. In less of course you have 51% of the company.

Just trust, and regards to the above post. 9 out of 10 times when money is involved with two good friends it does turn them against each other.
I am currently in a process of developing something w/a good buddy of mine, we both butt heads, but both get along with each other well. No profits have been made yet, so i guess we'll see how it goes. And we do not have "separation of duties" which might come into conflict later on, but right now it is going great.
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