Questions to Ask Before Investing in Your Child’s Business

The answers can help you make a sound decision about whether to put money into your child's business venture.

father and daughter talking

Having your son or daughter share plans to be an entrepreneur can bring feelings of pride and anxiety, especially when they need some capital to start the business. It might be tempting simply to follow your emotions, but that often doesn’t end well, says Lisa C. Williams, Senior Wealth Planning Strategist at Wells Fargo Private Bank.

Instead, it’s better to approach the request as a business decision and a potential financial opportunity first, and then examine the emotional aspects, Williams advises. To help you make that separation, Williams recommends having a conversation with someone experienced in family businesses. “A wealth advisor or a wealth planner who deals with business owners can look at your situation from a holistic, intergenerational perspective,” Williams says.

With family, there can be multiple factors that determine whether a business investment makes sense, and they typically fall under three main categories: how you define success, the potential impact on family relationships, and possible long-term implications.

Agree on your definition for success
Williams typically starts with two questions: Is there a viable business plan? And how will you and your child define success for the business?

Many of the factors involved here are the same you’d consider when investing in any new business:

  • Startup costs, including any technology costs
  • Cash flow
  • Fixed costs
  • Business structure (S corp, C corp, LLC, partnership)
  • Creditors or other liabilities
  • Growth goals (and whether they’re realistic)

The next piece to determine: Is this investment a loan or a gift? “If it’s a loan, you’ll need to agree on the terms,” Williams says. “Will the business have enough cash flow to meet those terms? Are there clearly defined consequences of non-repayment or late payment? Is there a limit to the amount that you will lend? Are you an investor only, an owner, or on the board of directors?” The answers will help create the clear picture of success that you and your child will use as the basis of your agreement.

Explore impacts on your relationship
This is the more subjective and emotional aspect of the decision. First, discuss the investment with your spouse to make sure you’re in agreement.

If you will be involved in business operations, you should think about the state of communication between you and your child, and whether this new relationship is likely to make it better or worse. If other family members will be involved in the business, consider the impact on those relationships, as well. “This can bring up all kinds of family dynamic issues about owner employees and non-owner employees, family members that are in the business or out of the business, and all of the possible conflicts that go along with that,” Williams says.

Consider possible long-term implications
Nobody anticipates failure, but it’s essential to talk about the possibility, Williams says. If the business fails, how will that impact your child’s ability to support himself or herself and get future financing or employment? Could that impact you?

“Going into the decision with your eyes wide open will help you come out with a good plan,” Williams says. “That way, even if the business fails, you’re already prepared.”

Suzanne Bopp is a freelance journalist whose work has appeared at Salon.com and in Utne Reader. Image by iStock

What can Wells Fargo do for you?

Creating a plan for every generation of your family can be a challenge. Schedule time with your team to get started.

Wells Fargo Wealth Planning Center, part of Wells Fargo Private Bank, provides wealth and financial planning services through Wells Fargo Bank, N.A., and its various affiliates and subsidiaries.

Wells Fargo & Company and its affiliates do not provide legal advice. Wells Fargo Advisors is not a tax or legal advisor. Please consult your legal and tax advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your taxes are prepared.

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