Monday, April 4, 2011

using your head when evaluating business proposals from friends

Recently, friends and relatives have pitched ideas for financing certain business ventures or investments. It ranged from the ubiquitous internet cafes to residential real estate. Although there is a good chance of making money in such ventures. I have issues with a few things. First is trust. Money is quite a temptation and you can never be 100% sure of the people who will handle yours. I don't want to be sleep deprived thinking if the money is still there. This is made worse by the fact that the proposals I got offered very little control, especially that I reside overseas. They are basically asking me to trust them with capital and it will grow. That's not my style as I want to be involved in any business or investment I'm in. Second problem is, close relationships often get in the way of business and it's hard not to let emotions get involved. Surely, I love my friends and relatives but at the same time, I would want decent returns on the capital. If I were a stockholder, I would demand the very best from management. If not they get fired. This would be very difficult in a small business involving relatives or friends.

The key is to evaluate each pitch thoroughly. The following guidelines might help:
1. The proponent must have a track record. I will not finance a business idea from a 16 year old cousin who hasn't done it before. Not because of his age, but because I need to be comfortable in the fact that he has experience handling money, best if it was his own at first and maybe he can handle mine.
2. The business plan must be very good. And I mean a written business plan. It doesn't mean that just because they're close to you, you'll just throw money on a poorly thought out business or investment plan.
3. He must be able to answer all of your questions regarding the planned venture satisfactorily. That would mean that the person is serious about it.

Even the perfect plan carried out by a trustworthy, hardworking friend can still fail so I would only invest the amount of money I would be comfortable losing. The downside would be little money lost but the upside is great. If the investment or business thrives. Not only will you earn, you would have helped someone else too.

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