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As an investor, what kind of return should I anticipate?
If I were to invest $40,000 to help start a trucking business, what type of return should I expect on that $40,000? I've never done this before and want to be fair to everyone involved.
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Being fair to everyone involved starts by being fair to yourself. You can buy a lot of things for $40,000. Before you worry about what's a fair return, ask whether there will be any return at all. Here are some things to consider:
Professional investors put their money into companies that can take off like rockets because so many fail that they have to make their money back with the winners.
What makes you think you'll get any return at all? How do you, as an investor, get money back out? If you take ownership, like most investors do, then you get money back only if the business sells ito another business or goes public, or is profitable and pays dividends. If you don't have majority ownership, you can't force any of those things to happen; you just have to sit aside and wait and hope.
How much ownership are you going to take? Forty thousand dollars might be the full investment in a trucking business, or just a tiny percentage. Will you have control? How much?
Is there a payback written into the documents, like a loan? Sometimes in these cases the investors get $60,000 or even $80,000 back in three to five years, plus substantial ownership (maybe even 100 percent if the business can't make those payments.) This can be done if it's written up right.
The worst payoff is minority ownership in a privately held small company. In that case, you have no say in the business and no way to get any money back.
I know this is not a straight answer, but I don't have enough information to provide a more complete response.
Tim Berry is the president of Palo Alto Software Inc., which produces the industry's leading business planning software, Business Plan Pro, as well as other popular planning applications for businesses.
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