Q: Our son has a real estate business, and he's making a profit of about $85,000 a year. He and his five agents work very hard, but business is slow. He has borrowed money before and always paid it back. He doesn't have too much to invest back into the business, say for marketing and advertising.
Rather than ask us for a loan, as he doesn't know when he could pay us back, he suggested that we invest in the company for a percentage of ownership. We're both retired, and we can afford the $20,000 he says he needs. Do you think this is a good idea, or should we just give him, say, $13,000? --RA, via email
A: This is a very personal decision. That said, my advice is to give him $13,000.
Here's why:
A prudent person evaluates the relative risks and rewards of an investment before he puts his money into it. How can you do that in this case? It's very difficult, if not impossible, for a loving parent to make an impartial assessment of a business that is run by his child.
In other words, you can't objectively judge how good an investment this is. But it's certainly an illiquid one. Your son is the only person to whom you're likely to be able to sell your stock. That's an important consideration because you can never tell when you'll be hit by unexpected expenses.
Moreover, every investor expects -- and should expect -- to earn a good return. Currently, your concern that your son's business is slow is just natural sympathy from a loving parent. But if you become an investor in his company, your interest in his business will be financial as well as emotional. Legitimate questions from an investor can sound very much like unwelcome criticism when the investor is also the chief executive's parent. It may become difficult -- for you and for your son -- not to confuse the two.
A gift is entirely different. You give to your child because you love him and it makes you happy that you can afford to make his life easier.
Your son is clearly hardworking and conscientious. His past financial behavior has been exemplary, and he's being scrupulously honest about not knowing when he could repay another loan. Making him a gift takes that problem off the table.
It's wise to limit your gift to what you can afford. True, $13,000 is less than the $20,000 he'd like to put into his business. But I think $13,000 with no strings is a better choice than a $20,000 investment that you may both live to regret.
Please send your questions to [email protected]. I'm sorry I can't respond personally to every email. Questions are only addressed online.
(c) Lynn Brenner, All Rights Reserved
