Helping my Son starting business

[Claire Dymond]

My son wants to start his own business in the precision engineering field which he has worked as an employee for 8 years.

He has no savings to speak of and considering that even the cheapest machining centre is around £35k plus VAT I have offered to help him by supplying the money to get started.

I have offered to become a director with a half share in the company and lend him personally £25k so he can invest this in the business and I will do the same. He can pay me back in £5k chunks starting with the personal loan and then moving on to buying my share out of the company in £5k chunks, my ownership reducing proportionally.

Can anyone see any non personal problems in doing it this way.

 

[Paul_Rosser]

Weirdly I have a lot of clients (including an uncle) in the precision engineering field.

How a lot of them started out was by renting space from other engineering firms with spare capacity, then they get to use their machines and see how much business they get without the massive capital expense of having to find a workshop and buy the machines.

If things go well then they can start saving for their own space and machines, if not then you haven't sunk a lot of cash into the business.

The issue with spending 50k of your money is what happens if the company doesn't do well ? Your shares won't be worth anything and your son will end up owing you 25k, which he probably won't be able to pay back.

 

[Chris Ashdown]

Rather than buy machinery you should consider leasing either new or near new equipment, but and the big but can he sell, he may well be a expert on a machine but selling at a profit is a totally different animal and I would expect him to be able to prove that ability before lending him any money

Whilst we all like the latest all singing all dancing machines, quite often we only use a very small part of a machines capability, so do question if you need the top of the range or the bottom of the range, you can always move up if it proves nesassary, but if you start at the top and dont use it then its costing you a lot of wasted facility or put another way loads of cash you had but now need

 

[businessfunding]

As has been said above - hen lending money to family you need to accept that you might never see it gain. Even on lease / HP you will have to PG the transaction so that really depends on your alternative uses for cash.

There might be ex-repo equipment which you will get on softer terms - feel free to PM me to explore this.

With a commercial - non-paternal head on, do take care not to over capialise the business - a lean start is very healthy!

 

[Philip Hoyle]

Getting the equipment is only a tiny piece of the jigsaw. Where will he find the work? What contacts does he have? What kind of work will he be doing? What size of premises, and with that, how will the ingoing, rent, insurance, rates, alarms, waste disposal and power be paid for - a lot of these are up=front costs. What staffing will he need?

When you're talking about this kind of money, you need a robust business plan to illustrate how the business will operate, what resources will be needed, etc.

Throwing a load of money into a business is no guarantee of success. OK, you may have a machine to sell if the business fails, but what about all the other costs you've paid, i.e. rent, rates, marketing/advertising, professional fees, etc - all lost.

In my experience, the businesses that start with a shed load of cash have a higher risk of failure as the money is frittered away. By contrast, the shoe-string start ups tend to have a longer life as when money is tight, people tend to make better decisions.

Rather than chucking £50k in, I'd suggest that you/him start small with cheaper equipment (cheaper premises etc)., and then let it build naturally as you/he develop the necessary business skills. Once he's out in the business world, he may realise that the £50k would be better spent on a different type of machine!

Another funny thing from my experience is that the first business people start is very rarely the same kind of business that they end up with. Building business experience is also about making contacts, i.e. customers, suppliers, staff, accountants, lawyers, bank managers, etc., and as you talk to people, you learn things which can help you change your business direction. A few years ago, I had a very successful client who was selling food into the major supermarkets, but who had started with a clapped out fish van selling fish door to door! He only got into food processing via a long and torturous route which built solely on people he'd previously dealt earlier in his business life.

 

[Claire Dymond]

Thanks guys, I should say that the workshop is already up and running (as a sideline to his full time job) at industrial premises I own so no need for premises. The machine required is almost bottom of the range at £35k plus VAT.

Leasing/HP works out at about 7% which is more than the interest rate I can get on £50k so my thinking is just buy it outright.

I'm confident in my business skills to make sure it does succeed and just wanted to know if there was anything that I hadn't thought of.

 

[Paul_Rosser]

As a thought rather than buying the machine through the company, why not pay for it personally (or via a 2nd limited company) and lease it to the business ?

That way if the company does have issues and has to fold it won't be an asset of the business for an IP/Liquidator etc. To sell off and pay any debts (and their own fees!).

Also tell your son to get out there and network with other engineering firms, lots of those I deal with pass work to each other when they have a big order they can't turnaround quickly enough.