I've been asked to help a small business but have concerns

[onlyway019]

My partner is currently working for his family's small business. His father started an LLC with a co owner and they got a business space a few months ago. Eventually my partner and his brother will fully take over the business after his father retires.

It is a small eatery that opened it's doors last month. Because it just opened, the business has been really slow due to a less than desirable location and not many people know about the place or even stop by. I believe it has great potential as the food, staff/service and business concept itself is solid. It still goes to say that everyone still been worried that it's not going to do well and were in the talks of getting extra financing which they believe would allow their business to be successful. They are currently breaking even on their profit vs expenditures. The only staff employed are my partner, his brother and his parents.

His father applied for a small business loan of $300k which will be issued after the business has been 6 months in operation.

my partner and his brother asked me to also lend my financial support by applying for a personal loan and giving the amount to the business so they can start improving the business immediately while they wait for the small business loan. They were discussing a 30k amount or less, depending on how much I would qualify for or get approved for. They want the smaller personal loan to be used to apply for a liquor license and renovate for some seating as the biggest complaints the customers had were 1) they want beer and wine served and 2) they want to sit down and eat. The restaurant is currently take out and delivery only so the space was small to begin with.

With the larger 300k business loan his dad applied for, they were talking about buying the space next door to the business to expand more space and accommodate more sit downs, and pay out the current tenants to leave. They want to change the electric stoves to gas range stoves. After getting the money they also want to talk to the city and officially change to become a sit down dine in establishment. ultimately his father wants to pay out his co owner his 60k that he invested and tell him to be on his way because he no longer is interested in participating and has been unreliable as co-owner.

After his father gets the amount from the small business loan, he would use a portion of that to pay off the personal loan that I would potentially apply for. After all is said and done, they say I'll be a silent investor (while my partner and his brother run the operations) and receive 15% share of the business.

I have a few concerns about the role they want me to play. I consider it a lot of risk for me to take out a personal loan to help their business. If things do not go well, I am ultimately liable for the entirety of the loan as I would be the signer and if I cannot afford to pay it, it can devastate me financially. I work a good job but I also still have a lot of debt and my credit score is under 700 due to rough financial situations after I left college few years ago. If I was wealthy enough, I wouldn't have a problem gifting them an amount and helping out but I do not have the luxury to do so in my current situation.

I also am concerned if there are any legal implications that would come out of this situation. There's a chance the co owner would refuse to leave if he changes his mind and wants to still continue being involved. The tenants they want to pay out to leave the premises so they could expand could refuse to leave and may seek legal action. They have not yet discussed with the city to convert to dine in yet. I also am concerned that they're going to use one big loan to pay off one little loan and pay out one business partner to leave which doesn't seem like the best use of the finances.

I suggested my partner and I to speak with a financial advisor / investment advisor and perhaps a business lawyer regarding this issue and have everything in writing on clear terms and conditions if I were to consider helping them. He declined my proposal to speak to any professional and did not mention what he would do to have it in writing. I have asked my partner why nobody else bothered to help or apply for a loan and he said that he already asked and I was the last resort.

I spoke to some business owner friends of mine and they suggested that it was a low risk idea and that I should do it to support my partner and his business, and the loan I take out can ultimately build my credit. And if we get married some day I'll also have a vested interest in the business

I also had some friends suggest that the whole personal loan and business loan together was a bad idea, saying money, business and family do not mix and that my partner should wait until the 6 months is here and just use the small business loan money instead.

The thing is I care about the business's success because it is my partners livelihood. I genuinely do want to do what I can to help out if possible but I don't think that my applying for a personal loan to give the funds to them is beneficial. And the situation on how they're going to handle it seem strange to me. This is my partners first time running a business and I'm worried that his inexperience in handling this situation will be his downfall. I also don't have a lot of business acumen either.

I guess what I want to ask is what would any of you do in this situation? Tell them to kick rocks and wait for the small business loan after 6 months.. apply a personal loan to give them.. or something else? What else can be suggested to help their business succeed?

 

[robofan]

@onlyway019 Do you know 3 most important rules of real estate?
Location, location, location.

They are going to piss money away in a bad location. Do not put your money on the line for this.

You tell your partner that you will support him by keeping yourself from drowning financially, so that if worst comes to worst in this business, your good credit will be a safety net for both of your futures. It is not fair for them to put you in this position. They need to figure out another way.

 

[notb]

@onlyway019 Don’t do it. The business is set-up for failure from what you’re telling here. Let your partner have their business adventure, whilst you stay grounded and ensure that the bills at home can continue to be paid if things end up going not so well.

 

[matt123]

@onlyway019 You're right to be concerned, and not just a "little bit". This entire situation is nothing but huge red flags. I'm a CPA and if I had a friend, client, heck a bystander off the street describe this situation, I'd strongly advise them not to become involved and under no circumstances to borrow money to "loan" to this fairly certain to fail venture. Even well funded restaurants in good locations and run by experienced people have a high failure rate, what you're describing is... worse. You will almost certainly lose your loaned money and since this business has a high chance of failure, there will be nothing to pay you back with so you'll be stuck repaying whatever loan you take out. Not only that, but you aren't even married to this person, will have no ownership or control in this (already terrible idea) business... you might as well light this money on fire in your front yard. At least it would keep you warm for a few minutes.

The worst part about all this is this idiotic business is the focus of this entire family - your BF, his brother and father, all of whom are too blind or inexperienced to see disaster looming. They're all so invested it will be impossible for them to see why they shouldn't even be doing this, much less why it's a bad idea for you to be doing it, so you will be the bad guy if you say anything negative or that this is too risky for you. From a relationship standpoint, if your BF doesn't respect and support you enough to understand that this request is unreasonable, that itself says something. Within a few months you may be the only one in this entire group with an income but he already wants to drag you down with them with no concern for you or your legitimate worries? It's up to you if you think this is good partner material. If you do decide you want to keep the relationship, you'll need to keep your mouth shut while avoiding loaning money at the same time. You'll need to resort to the old smile, nod and then be evasive. "Yes, I understand your plan. I'll be glad to help however I can." then later "I am unable to borrow anything, sorry." Play supportive but dumb and unable to help.

Edited to add: not sure if you believe and are just repeating some of this stuff, but a lot of what you've been told sounds doubtful at best. If the business is only breaking even it's doubtful that they'll get a $300k loan. If the business is a small takeout with no seating, no liquor license, owners who didn't even know enough to get the correct fuel stoves and only breaking even, it's not going to support the father, mother, partner, brother and your boyfriend. Borrowing is only going to make it worse since they'll have debt payments on top of their existing expenses. There will be nothing to "inherit" in the future. Liquor licenses are often difficult to obtain and very expensive, so no guarantee of that or extra space (which they can't afford anyway) even happening. This entire thing seems based on incredible optimism layered on lack of planning or experience and blind faith.

 

[ethanhun1]

@onlyway019 More cash isn’t going to help this business. What they need is a bonafide plan for growing sales and achieving profitability. Sounds like it’s too late for that, run.

 

[mark6126]

@onlyway019 With your credit score and the situation calling for the money it would be doubtful a bank would lend you $30k with no collateral anyway.

Another anonymous internet rando here suggesting you pass on this "offer."

 

[priestlight]

@onlyway019 Honestly if they can't make it even 6 months without needing a loan I'd be a little worried.

It also sounds like they plan to just start throwing money at everything and anything in hopes of making it work.

You start doing things like trying to buy out neighboring businesses paying out partners and so on and they will quickly blow through 300k.

 

[mgrehab]

@priestlight

if they can't make it even 6 months without needing a loan I'd be a little worried

that and the complete lack of planning. You spend time building out the space and no one thinks they should have a seating area in a restaurant, no one makes a decision on electric vs gas stoves, no one considers a less than ideal location, and then you throw bad money after good by investing MORE in a less than ideal space.

It sounds like that have no plans to increase customers, no marketing or advertising plan, so there is very little way that they will recoup their investment.

 

[onlyway019]

@mgrehab I totally agree with lack of planning.

His dad set up the LLC before they even had the business space and was operating out of their home so their expenses were low and they were making profit.

What happened was, the co owner was looking on Facebook marketplace one day and saw this tiny business / commercial space for sale and immediately dropped his 60k on it the day he saw it. I don't know what prompted him to do so right away but he told my partners dad after it happened and it seemed like they had no choice but to move with it

And yes, they started changing their ideas after they started running the business. Now I do agree that it is sometimes necessary to change some things in business to find out what works better than others.

But I really don't think that they should be considering to become an official dine in with seating. Their whole original idea and concept of the place was solely for grabbing and going, with a heavy focus on delivery from in-house, grubhub/Uber eats etc. The original idea was also supposed to act like a "ghost kitchen".

And as for the electric vs gas stove thing they definitely could have had a gas range implemented before they officially opened for business during the building construction.

There's a lot of things that I don't know because I explained that I don't want Involvement with the business but this is ultimately what it boils down to from what my partner tells me.

 

[onlyway019]

@priestlight That was what I was thinking too. They are just starting off, opened in September. When they have good volume they do well. I really think they have a problem with the location, not reaching enough people and need to get their name out there.

I was in the "wait for their small business loan" school of thought. His dad wants to meet me tomorrow and talk about it.

Something tells me they are freaking out too early and my partner jumping the gun on it. I believe he somehow thinks that him getting more funds right away would automatically equal better situation.

 

[matt123]

@onlyway019

Something tells me they are freaking out too early

Um, no. They're freaking out waaaaaay too late. The time to have done the freak out was when they put together the plan and saw all the strikes against this place. Even well funded restaurants in good locations run by experienced people fail more often than they succeed. If this poorly planned restaurant that's supporting all these people is already struggling like this, there is little to no chance they'll actually get any loan to continue, much less a $300k loan to do the silly things they're planning to do with it. Of all the things you've described, freaking out is the most remotely sensible thing they're doing or have done. It's time to freak out. It's not time to layer on more dumb decisions, borrow more money or take down everybody around them.

 

[priestlight]

@onlyway019 Sounds like they really need to sit down and plan out a business plan and a funding plan.

60k on buying out a business partner isn't going to return any investment and could go a long way towards advertising and other uses.