{"id":180297,"date":"2023-04-05T01:34:00","date_gmt":"2023-04-05T00:34:00","guid":{"rendered":"https:\/\/legalvision.co.uk\/?p=180297"},"modified":"2024-05-15T06:50:50","modified_gmt":"2024-05-15T05:50:50","slug":"friend-family-risks","status":"publish","type":"post","link":"https:\/\/legalvision.co.uk\/business-sale-purchase\/friend-family-risks\/","title":{"rendered":"Legal Risks of Investing in a Friend or Family Member&#8217;s Business in the UK"},"content":{"rendered":"\n<p>Investing in a friend or <a href=\"https:\/\/legalvision.co.uk\/corporations\/family-owned\/\">family member\u2019s business<\/a> may seem like a great way to support a loved one while potentially making a profit. However, there are legal risks involved in such an investment. While the relationship may be personal, you should approach your investment as a business transaction with proper documentation and legal advice. This article will explore the legal risks inherent in friend and family investments.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">1. Lack of Due Diligence<\/h2>\n\n\n\n<p><a href=\"https:\/\/legalvision.co.uk\/business-sale-purchase\/due-diligence-business-sale-england-wales\/\">Due diligence<\/a> involves researching and analysing the business to determine its:&nbsp;<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>financial health;<\/li>\n\n\n\n<li>risks; and&nbsp;<\/li>\n\n\n\n<li>potential for growth.&nbsp;&nbsp;<\/li>\n<\/ul>\n\n\n\n<p>Investing in any company without proper due diligence constitutes a significant risk. This is especially true when you may feel like you know or trust someone already and feel uncomfortable conducting a thorough investigation of their business. However, it is essential to remember that you are carrying out due diligence against the <em>company<\/em>, not your friend or family member.<\/p>\n\n\n\n<p>It is crucial to thoroughly examine the company before investing any funds. This may involve:&nbsp;<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>reviewing financial statements, legal documents and contracts;<\/li>\n\n\n\n<li>conducting market research; and&nbsp;<\/li>\n\n\n\n<li>assessing the competition.<\/li>\n<\/ul>\n\n\n\n<div  class=\"box box--icon box--warning\">\n    <p>Not conducting due diligence before a purchase could result in investing in a business that is not financially viable or has hidden liabilities.<\/p>\n<\/div>\n\n\n\n<h2 class=\"wp-block-heading\">2. Disagreements and Conflicts<\/h2>\n\n\n\n<p>Investing in <a href=\"https:\/\/legalvision.co.uk\/franchising\/franchise-family-business\/\">businesses with close friends or family<\/a> can create <a href=\"https:\/\/legalvision.co.uk\/disputes-litigation\/co-founder-dispute\/\">personal conflicts and disagreements<\/a>. Even with the best intentions, disputes can arise over business decisions, finances and money management.&nbsp;&nbsp;<\/p>\n\n\n\n<p>Nobody wishes a business investment to end up harming personal and emotional ties. However, any company can fail, and it is worth being aware that a business failure can be more challenging to navigate if a friend or family member owns the company.<\/p>\n\n\n\n<p>For example, any business failure may create a difficult situation where you must either support the friend or family member or cut ties and pursue legal action to recover your investment. This can be incredibly challenging if the person is a close friend or family member, leading to strained relationships and hurt feelings.&nbsp;<\/p>\n\n\n\n<p>It is, therefore, essential to establish clear communication and expectations before investing any funds. This may involve creating a formal business agreement or contract that outlines roles, responsibilities and expectations. An expert lawyer can help make a legal agreement that can help prevent or resolve conflicts.<\/p>\n\n\n\n    <div class=\"my-7 lg:my-10 border-y-2 border-gray-100 py-7 lg:py-10 flex flex-col sm:flex-row items-start gap-10\">\n                    <img decoding=\"async\" class=\"w-52 mx-auto my-0! rounded\" src=\"https:\/\/img.legalvision.com.au\/wp-content\/uploads\/sites\/4\/2023\/01\/13013547\/buying-a-business-560x792-1.jpg\" alt=\"Front page of publication\"\n                 loading=\"lazy\" width=\"208\" height=\"298\">\n                <section>\n            <div class=\"text-2xl font-bold\">Buying a Business: Guide to Negotiating Terms<\/div>\n            <div class=\"body-text\">\n                <p>Buying a business? Download this free guide to help you negotiate key terms like price, stock, and employee entitlements.<\/p>\n            <\/div>\n            \n\n<a href=\"https:\/\/go.legalvision.co.uk\/buying-business-guide.html\" class=\" block px-5 py-3.5 max-w-fit bg-orange button__hover transition rounded text-white font-bold text-lg no-underline uppercase leading-tight text-center\" target=\"\" rel=\"\">Download Now<\/a>        <\/section>\n    <\/div>\n\n\n\n\n\n<a href=\"#content-next\"\n   class=\"block p-4 mt-10 text-xl font-bold text-center text-white no-underline bg-gray-800 rounded-t-xl\">\n    Continue reading this article below the form\n    <i class=\"text-xl fa-regular fa-arrow-down\"><\/i>\n<\/a>\n<div class=\"px-6 pt-10 pb-12 mb-10 text-center bg-gray-100 rounded-b-xl sm:px-12 test\">\n    <div class=\"mb-8 text-2xl font-bold text-orange\">\n        Need legal advice?\n        <br>\n        <span class=\"text-lg not-prose\">\n                            Call <a 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Lack of Control<\/h2>\n\n\n\n<p>Investing in a friend or family member\u2019s company may also mean having limited control over the business. Depending on the investment structure, you may not have a significant say in business decisions or management. This will be a concern if your friend or family member mismanages the business in a way that reduces the value of your investment.<\/p>\n\n\n\n<p>Understanding the level of control and repayment terms you have as an investor is essential before investing any funds. If you desire a high level of control, you may need to negotiate this within the legal document recording your investment.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">4. Not Seeking Professional Advice<\/h2>\n\n\n\n<p>You should only invest in a business after obtaining expert advice on its financial, tax and legal consequences. However, many potential investors fail to get professional advice when investing in a friend or family member\u2019s business due to their personal connection with the owner.<\/p>\n\n\n\n<p>Unfortunately, engaging in a friend or family member&#8217;s business without this advice puts you at risk of a poor deal. Worse still, you may be in a poorly run business, unable to extract your investment quickly. Therefore, obtaining expert advice from lawyers and financial advisors before putting pen to paper on business or equity investment is crucial.<\/p>\n\n\n\n<p>Most experts advise you to treat the investment like any other business transaction. It is essential to approach the decision whether to invest with a level head and, as above, to ensure thorough due diligence.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Key Takeaways<\/h2>\n\n\n\n<p>Investing in a friend or family member\u2019s company can be a rewarding experience, but it is vital to consider the legal risks involved before doing so. Conducting due diligence, establishing clear communication and expectations and consulting with a lawyer can help mitigate legal risks and protect your personal and financial interests.<\/p>\n\n\n\n<p>It is worth considering the potential impact of your personal relationships before investing. Consider how the investment may impact your relationship with the person and whether the business failing will strain or end that friendship or relationship.<\/p>\n\n\n\n<p>If you need assistance investing in a friend or family member\u2019s company, our experienced <a href=\"https:\/\/legalvision.co.uk\/business-sale-purchase-lawyers-lp\/\">business sale lawyers<\/a> can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on <a href=\"tel:+448081968584\" class=\"AVANSERnumber dynamic-number\">0808 196 8584<\/a> or visit our <a href=\"https:\/\/legalvision.co.uk\/membership\/\">membership page<\/a>.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Frequently Asked Questions<\/h2>\n\n\n\n<div class=\"schema-faq wp-block-yoast-faq-block\"><div class=\"schema-faq-section\" id=\"faq-question-1680654515455\"><strong class=\"schema-faq-question\"><strong>Are family investors common in the UK?<\/strong><\/strong> <p class=\"schema-faq-answer\">Many startup founders seek initial funding from family members and close friends rather than accredited investors. This is because family funding usually involves more patience and trust than money from outside investors.<\/p> <\/div> <div class=\"schema-faq-section\" id=\"faq-question-1680654523502\"><strong class=\"schema-faq-question\"><strong>What is the main difference between a loan and an investment?<\/strong><\/strong> <p class=\"schema-faq-answer\">An investment usually sees an individual obtain a share of the company, whilst a loan is purely a promise to pay the money back (at an agreed interest rate).<\/p> <\/div> <\/div>\n<div class=\"not-prose m-feedback-prompt\">\n    <!-- Thumbs up\/down bar -->\n    <div class=\"m-feedback-prompt__main\">\n        <div class=\"m-feedback-prompt__title\">Was this article helpful?<\/div>\n        <div>\n            <!--span class=\"m-feedback-prompt__button--text\">Thanks!<\/span-->\n            <button type=\"button\" class=\"m-feedback-prompt__button m-feedback-prompt__button--yes\"\n                    data-analytics-link=\"feedback-prompt:yes\" aria-label=\"Agree\">\n                <i class=\"fa-regular fa-thumbs-up fa-3x\"><\/i>\n            <\/button>\n            <button type=\"button\" class=\"m-feedback-prompt__button m-feedback-prompt__button--no\"\n                    data-analytics-link=\"feedback-prompt:no\" aria-label=\"Disagree\">\n                <i class=\"fa-regular fa-thumbs-down fa-3x\"><\/i>\n            <\/button>\n        <\/div>\n    <\/div>\n\n    <!-- Feedback form -->\n    <div class=\"m-feedback-prompt__form\">\n        <div class=\"m-feedback-prompt__form--thanks \">\n            <div>Thanks!<\/div>\n            <p>\n                We appreciate your feedback \u2013 your submission has been successfully received.            <\/p>\n        <\/div>\n        <form id=\"contact-form\" class=\"m-feedback-prompt__form--form\" action=\"\" method=\"post\">\n            <input type=\"hidden\" id=\"authenticity_token\" name=\"authenticity_token\" value=\"9eb4f72322\" \/><input type=\"hidden\" name=\"_wp_http_referer\" value=\"\/api\/wp\/v2\/posts\/180297\" \/>            <input value=\"https:\/\/legalvision.co.uk\/business-sale-purchase\/friend-family-risks\/\" type=\"hidden\" name=\"currenturl\"\n                   id=\"currenturl\">\n            <input value=\"Legal Risks of Investing in a Friend or Family Member&#8217;s Business in the UK\" type=\"hidden\" name=\"currenttitle\"\n                   id=\"currenttitle\">\n            <label>\n                <!-- display on thumbs-up -->\n                <span class=\"m-feedback-prompt__feedback m-feedback-prompt__feedback--yes\">\n                    Can you tell us <span class=\"font-semibold\">why<\/span> you found it helpful?\n                <\/span>\n\n                <!-- display on thumbs-down -->\n                <span class=\"m-feedback-prompt__feedback m-feedback-prompt__feedback--no text-lg\">\n                    How can we better improve this article?\n                <\/span>\n                <textarea name=\"feedbackmessage\" id=\"feedbackmessage\" required><\/textarea>\n            <\/label>\n\n            <div class=\"m-feedback-prompt__form--error\" id=\"form-submit-error\"><\/div>\n            <button id=\"submit-contact-form-button\" type=\"submit\" name=\"commit\" class=\"m-feedback-prompt__form--submit\"\n                    data-analytics-link=\"feedback-prompt:submit\">\n                Submit            <\/button>\n        <\/form>\n    <\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>Investing in a friend or family member\u2019s business may seem like a great way to support a loved one while potentially making a profit. However, there are legal risks involved in such an investment. While the relationship may be personal, you should approach your investment as a business transaction with proper documentation and legal advice.<a href=\"https:\/\/legalvision.co.uk\/business-sale-purchase\/friend-family-risks\/\">Continue reading <span class=\"sr-only\">&#8220;Legal Risks of Investing in a Friend or Family Member&#8217;s Business in the UK&#8221;<\/span><\/a><\/p>\n","protected":false},"author":13349,"featured_media":3250,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_relevanssi_hide_post":"","_relevanssi_hide_content":"","_relevanssi_pin_for_all":"","_relevanssi_pin_keywords":"","_relevanssi_unpin_keywords":"","_relevanssi_related_keywords":"","_relevanssi_related_include_ids":"","_relevanssi_related_exclude_ids":"","_relevanssi_related_no_append":"","_relevanssi_related_not_related":"","_relevanssi_related_posts":"174239,173993,175563,2395,4198,1766","_relevanssi_noindex_reason":"","editor_notices":[],"footnotes":""},"categories":[29],"tags":[20,21,168,529],"class_list":["post-180297","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-business-sale-purchase","tag-small-business","tag-medium-business","tag-due-diligence","tag-investment"],"acf":[],"yoast_head":"<!-- This site is optimized with 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