04 Jan Investing in a relative’s business

Q. My brother-in-law has a successful construction firm. He wants to open a branch in another county and he’s asked me to be an investor. How can I decide if I should? What should I ask him?
— Cautious

A. When a family member brings up in a financial discussion, it doesn’t often end well — especially when your relative asks for money.

Start by asking yourself why your brother-in-law wants you to invest.

“If I had a golden goose that laid golden eggs, why would I ever give anyone an opportunity to have a piece of it when I can have 100 percent of the golden eggs with no shareholders asking, ‘When are you giving me more golden eggs?’” said Jerry Lynch, a certified financial planner with JFL Total Wealth Management in Boonton. “Beware of the naked man offering the shirt off his back.”

Lynch said if the expansion of your brother-in-law’s firm is such a great deal, he probably wouldn’t be looking to see how he can make you wealthy.

You’re being asked to invest because there’s a risk your brother-in-law wants to avoid, and that why he’s looking for other people’s money, Lynch said.

Lynch said small business are incredibly complex for a non-business owner to understand, and it’s possible your brother-in-law is taking advantage.

For example, Lynch said, small business owners will often mingle their personal and business expenses. The business might pay the costs of cars and business lunches. If that’s the case for your brother-in-law, your investment in the business could be trouble.

“What I deem as reasonable as the business expense as a sole owner is very different than what you as an investor may see as reasonable,” he said. “How will this carry over to Christmas dinner or the next family function when he arrives in his new shiny Mercedes?”

So, Lynch said, he wouldn’t do it unless there’s a compelling reason you didn’t share with us.

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This post was first published in January 2017.