I Have Been Given Opportunity To Invest In A RE Brokerage

[John Thedford]

I have been given the opportunity to invest in a new RE brokerage. The people that want to start it are top notch, motivated, ethical, honest, and go getters. I don't think I could find someone I would trust more or have more faith in. I don't know what to expect or how to handle structuring the deal. I don't want an active role..strictly a silent interst that will give me a profit starting in year two. The funds I invest would not be a loan...and if things so sour..my loss. What advice as far as buying into a brokerage does anyone have? If it costs 50K to start, and I put up 1/2 the funds, should I expect 1/2 the profits as a silent partner?

[J Scott]

First, I would analyze the business just like any other business, regardless of whether it's a brokerage or not. The questions you should be asking:

- What business experience do the founders have?
- What is their track record for starting businesses?
- Does their business plan make sense?
- What is their niche and/or competitive advantage?
- Do they have income and cash flow projections that make sense?
- Do their cash flow projections indicate that they will remain solvent or require additional capital injection at some point prior to profitability?
- How much of your investment will go into hard assets that can be liquidated should the venture fail (in other words, will you get anything back)?
- Will the principals be putting in their own cash as the other 50% or getting another investor (in other words, what exposure/risk do the founder have)?

You need to ensure that you're investing based on the business plan and the expertise/experience of the founders, and not based on your "trust" or "faith" in them. They could be the most trustworthy and honest people in the world, but that doesn't mean that they know how to successfully run a business.

In fact, I would forget about your personal relationship with the founders and ask yourself if you'd invest in the business if strangers came to you with the same business plan and level of experience?

That said, in terms of your equity stake, 50% contribution to startup costs would generally entitle you to up to 50% equity in the business. If the founders have significant experience, a great track record, a huge competitive advantage, etc., they might command some equity outside of any capital contributions they might make. So, it's possible your 50% capital contribution may be worth less than 50% of the equity...but likely not more.

Try to negotiate as much as you can, keeping in mind that you want the principals to have enough equity (if they aren't making a capital contribution) to ensure they are motivated to succeed. That said, if they have no capital contributions (i.e., no "skin in the game"), I'd think twice about investing. You don't want to invest in something where those who are doing the work can walk away without any risk of loss.

Long story short, there's a lot of things that are specific to the situation, and with the little information you've provided, it's hard to give you a good answer to your question of how much equity is fair. But, those are some things to think about...