The Floundering Business Deal

This post is an update on my fledgling Business Deal(read this if you want the backstory). It started in 2014 and went smoothly for 3 years. Since then he have hit some bumps in the road.

After a couple years of gathering PF knowledge nuggets, I have realized that lessons really do come from the wins as well as from the losses.

A sense of vicarious fantasy is how I started out lurking on other people’s net worth sites. A sense of schadenfreude came later, but was equally compelling.

I would love for my blog to feature win after win on my way to the Finish Line. However, that would be somewhat disingenuous. By now, I also believe it would be LESS helpful to any readers who routinely follow my progress. So here we go;

The first part of the deal was for me to get my original $75,000 loan back in 5 years at the rate of $1,250/month. Keep in mind, this is a VERY QUICK turnaround. A normal business loan from the bank has a 15-20 year payoff schedule.

As of today’s date, I have been paid back $ 92,174 of that original $75,000, but I was supposed to get a total of $155,000 back. An original investment plus some profit. The good news is that only $25,000 of that original money was in my own cash, the other $50,000 was in a line of credit I keep for when opportunities arise. I have since paid back the entire $50,000 loan and only had to pay $ 4,199 in interest payments.

I am good with my actual ‘cash out the door’. But this has not exactly been a home run in terms of investment dollars working for me.

Here’s what happened. My partner also had to pay off the original owner of the business. This chunk was seller financed and amounted to a $2,000/month payment for a touch over 3 years. Again incredibly fast payout. This loan is completely paid off. Lucky for that original owner, business was good for 2014-2016.

2017 was a different story, the numbers were down. I am not really worried because this business has been around for 10 years now, so it has lasted the test of time. Business cycles happen. I took a hiatus from monthly loan payments for all of 2017. Ouch.

Since then business is back to OK, but my friend has had a rough year in her personal life. The original $75 is now paid back, but;

The second half of the original deal was that I get to make money by getting a monthly payout of 3.5% of gross profits each month until I doubled my original $75,0000. Plus another $5,000 to cover the interest I would owe to my bank paying back the original HELOC loan of $50,000.

These 3.5% payments average out to about $425 a month. They should be coming in for many years to come. I wanted that as a supplemental income during my gap years after I stop working but before I get my pension/social security checks 10 years into my leaving ‘paycheck type employment‘.

These payments have also been spotty since 2017 with only sporadic payments being made.

So yeah, not so great. A good start, but a petering out.

Here are my thoughts/observations.

Remember that old saying ‘Never lend money to friends‘. There is a reason people say that.

But I am OK with that for 4 reasons;

  1.  I wanted to help my friend out. This has always been a dream of hers and I was able to help make it come true. This is one of the things having money is for.
  2. I did not spend money I could not afford to lose. Number One Rule of Gambling. I actually started out with the premise that if this might all go south, would I still be ok? Would we be jeopardizing the relationship?
  3. I actually think things will work themselves out. This friend has an excellent head for business merchandising and we are in this for the long haul. Having a deep money bench means I am able to do things like suspend payments for a calendar year to help the business survive through a rough patch.
  4. I believe in karma. Doing good things for people for the right reasons is never a bad idea. I also learned things while dipping my toes into small business without losing my shirt.

My friend and I keep open lines of communication. I look over her books, we still make plans for the future of the business, but here are the things I did wrong;

There is no collateral tied to this agreement, I am stuck with whatever happens. The store does have some sale value, but I am not looking to terminate this income stream. I will holdout long enough to see it come back again. I did however remember to use an attorney besides myself to look over the contract.

We may have also put unrealistic timetables on repayment. Valuing businesses and future revenues are tricky concepts.

This venture has tied up capital and made me retard my next phases of empire building. At some point in the future this whole adventure will tilt into the ‘bad idea‘ column. We are not there yet.

I would love to hear your thoughts as to the relative merit or utter stupidity of this chapter!

Follow along on my next Small Business Adventure.




10 thoughts on “The Floundering Business Deal

  1. i think once it gets comfortable for a friend to miss payments is when the trouble begins. you got most of your money back, which is nice. i like open communication on these matters but i like retaining friendships the most. they’re hard to come by when you’re “quirky.”

    • This relationship goes back to 1988. She has always been flaky and I knew this going in, we will get by.

  2. Definitely treading in dangerous waters when investing in a friend. Many friendships have been ruined in past by deals gone south.

    Also if friends come to you for money for a business opportunity, I think it would be wise to first think that you are there last resort and they have been turned down by lenders who lend money as a living (i.e. people who likely have far greater resources analyzing if lending money is a good idea or not).

    Hopefully karma shows it fortune for you helping a friend. As long as whatever happens your friendship can survive, then at least you gain experience from it.

  3. Reasons 2 through 4 don’t hold water. If you took out a heloc then of course you couldn’t afford to lose the money, it isn’t even your money! You think things will work out? That is actually you stuck in the sunk cost fallacy. There is no evidence to support that hope and it is only the fact you are in pretty deep that is sustaining it. And finally Karma sucks at math, and I doubt karma rewards somebody giving money to someone that is obviously not concerned about ever paying it back. It is no coincidence that every person that commented sees you are making a big mistake. Karma is best known for smacking people that do what you’ve been doing in the side of their head.

    • I used the HELOC because my other monies were doing better than the 3-4% interest I had to pay to use that money. My only out at this point is to force a liquidation, I would get out my original money but the current risk/benefit equation is to risk losing $12k to get $90k more if things stabilize. Still good odds. The mistake has already been made, now we are in the damage control phase.

    • Steveark, You may not like the word ‘karma’ but the concept I was edging around pop up more than once in your own blog, under “I Gave Away 2 Million Dollars” and under “What My Parents Taught Me bout Money”. They were great reads and you articulated better some of the same underlying notions I meant to convey.

      • Ok, you got me! I agree that helping others is a good thing and practice it myself. And I wasn’t sure on the heloc, I hate leverage but the math would agree with you there so I realize that is a personal prejudice of mine and not always an optimum point of view. I was being pretty harsh and working on partial information but it felt like you were being nice to a fault and I wanted you to consider if that was in fact the case. At the end of the day however you have the most information and you should be capable of making the best decision. Thanks for reading my blog, I enjoy yours as well, I appreciate your comments. You sound like a very good friend to have!

  4. I bet you did the evaluation before you gave the money and it was not just a plain gambling act. You know the business, you know your friends skills and you made a decision based on these facts, right? Also, I assume you knew that things can go south and you can have a much longer payout period or even lose everything. And you still did it. So I see no surprise here. Life always comes in the way. If your friend is equally fair than you then things should solve themselves. I don’t think there is an english version for that but in Hungarian there is a saying “time will roll it out”. To be honest I was in a similar situation much earlier in my life which ended pretty badly. We are talking about closest relatives so if you would ask me if I would do things differently my answer is yes and no. Yes, I would look closer how the things are going. And no, I would not refuse my help from him, even knowing the outcome. There are things which worth more than money… The only thing I regret is that I was not able to help more.

  5. Thanks for an interesting read. It seems like you’ve gone into the “lending money to friends…” situation understanding the risks. Good luck going forward!

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