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Silent Partner

June 10, 2017

Can You Remain Silent as a Silent Partner in a Company

Let’s face it, you know you have what it takes to own and run a business but do you really want all the hassles that go with it? Yet, you just can’t get past the idea that you would be great in some form of business. If this sounds like you then just maybe you would be a candidate as a silent business partner. It certainly could have its financial perks. Before making any real decision about this let’s consider what it really does take to be a small business partner, and really what’s in it for you?

Can I Really Make Money?

The quick answer is yes, you can make money, but initially you are most likely going to be required to make an investment into the company on a financial basis. A silent partner is usually the one person who will put up some money then let the other partner or partners run the entire show.

What you are going to make for this is all going to depend on the type of deal that you negotiate. Most likely the deal will be that you get a percentage of the profits of the Company.

How much of a percentage is going to be determined on how much money you are investing. For example, if a Company is worth $10,000 and you invest one thousand dollars then you have taken on the role of being a 10% partner. The money you would then receive would be based on 10% of the profits. The more money you invest the more percentage you are going to get back on your investment.

When I join a company as a silent partner I usually choose to have shares in the company BUT without being a director or being the main share holder. This is great to reduce my liability and exposure.
In some cases I will choose to get royalties and not shares. That means I will get a small percentage on every sale the company makes. Both ways work and it will depend on what you would like to have from this company.

A Hypothetical Silent Partnership

If you took on the role of being a 10% silent partner and the Company made $100,000 profit in the next year then at the end of that year you are going to get $10,000. Which may have been based on your $1,000. Investment if that was the terms of your agreement.

This can be pretty lucrative however, you need to really understand what the percentage is going to be based on. Most likely it will be net profit and not gross. This means you will only get 10% on the money left over in the company after all of the expenses of the Company have been paid. This of course is going to make a big difference to the chunk of money you stand to make.

Can You Really Remain Silent?

The point is as a silent partner the only think the company really wants from you is your money. It is a tough role that you are taking on because its partly your money that the company is using and you might not have any say as to how it is used even if you disagree with it. Then again, if you have some good business sense you may be asked to contribute more than your money. This is one of the reasons why if you are going to make this type of investment you need to have some business experience. If you don’t have any business experience or business sense then do yourself a favor and stay away from this type of investment.

Are You Prepared to Negotiate Your Potential Profit?

The ideal of ending up with a 10% profit based on the Company’s net profit may not be all that appealing to you. A better deal may be to negotiate royalties on the services being provided by the Company.
This is the way that I like to run silent partnerships in most cases. I will take royalties until I have tripled my investment. The advantage to this is you can double or triple your money based on what the company does. You can forget about the issues of determining the justification of the net profit figures.

This seems like a good business deal and it can be but there could be some repercussions. If the Company tells you they are not performing any services or sales it can then mean you need to get legal help to determine the facts. Now you are eating into your potential profits.

The Basic Steps for Becoming a Silent Business Partner

Step One: Finding the Right Partner

Chances are if people know that you have money to invest they will approach you and your won’t have to go looking for this type of business deal.

Step Two: Do Your Homework

If you are thinking about becoming a silent partner then you need to think carefully and do your homework.
You will need to know exactly what the company is expecting from you by way of investment. Is the company solid or is it viable? Do you see a growth path that can triple your investment? Do you see potential risks? Does the company carry any debt that will restrict you from getting your profits?

Step Three: Be a Savvy Negotiator

Can you negotiate a better deal than just a percentage for yourself that is not going to put you at a greater risk? You may be the silent partner but you do not have to be a silent negotiator. For this type of investment it should be on your terms.