How to Pitch Your Business to Friends and Family
It's important to preserve relationships and protect everyone involved when tapping your family tree for funding.
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Who better to put money into your brilliant business idea than people who can already vouch for you? Friends and family are an obvious source of funding. And in this era of ebbing small business lending by banks, if you don't have an interested investor, why not turn to mom, pop, and the rest of your clan?
"Trust. That's it. Hands down. Family members especially – they've watched you all your life," says Wayne Rivers, president of the Family Business Institute Inc., a family-business consulting firm based in Raleigh, North Carolina. When traditional funding sources aren't available, especially to young entrepreneurs who lack collateral, family members can bridge the gap.
Entrepreneurial relatives might say, "I started a business when your age: How much do you need?" But if expectations don't align, more than just your business can end up going under. Even a new endeavor that becomes wildly successful can wreak havoc on relationships.
To prevent shouting at the dinner table and lawsuit threats, pull together a careful plan that protects everyone involved. Here's how.
Pitching Your Business to Friends and Family: Do Due Diligence
The minute lawyers step in, they have a tendency to cause potential lenders or investors to run for the hills. Still, involving one is worth the reality check.
"An entrepreneur should sit down with an attorney up front before they make pitches rather than later saying, 'Let's get someone to bless this for everybody,'" says Greg Kruzel, a partner in the law firm Braun Siler Kruzel PC based in Scottsdale, Arizona, whose clients include entrepreneurs.
In addition, bouncing the business idea off an accountant and those who are already familiar with the market will help confirm that the venture is unique and sound. Kruzel describes a client who came to him as a potential investor in another person's startup. "He was being asked to invest $1.5 million in a venture for a software being developed in this industry," the attorney says.
Kruzel and his client found that a company already existed that was doing the same thing at a fairly high level. "It was a company that had been around for a couple three years. This other competitor here could squash him like a bug on a windshield."
Dig Deeper: When Family Funding Turns Into a Disaster
Pitching Your Business to Friends and Family: Pick the Right Moment
Making the business pitch to friends or relatives shouldn't involve a surprise conversation. The person should have notice that there is going to be a serious talk.
"The first thing I would do is test the waters," Rivers says. Consider whether the friend or relative has ever put money into a new business before. Having money doesn't necessarily go hand-in-hand with being entrepreneurial. If your grandfather launched his grandchildren's careers, there's a pretty good chance of success. On the other hand, if no one in the family has ever had an entrepreneurial pursuit, a new proposition might be too daunting.
Pairing passion for a new venture with a receptive audience is necessary in order to move forward with a plan. "This should be win-win and business-like in nature," Rivers says. "It shouldn't be because Grandma feels guilty that you didn't get a birthday present when you were 14."
Pitching Your Business to Friends and Family: Have a Business Proposal Ready
Articulate exactly what the business will entail and the reason for starting it. Banks and venture capitalists require a detailed prospectus. So should friends and relatives.
"What ends up happening later on that can be problematic is that the expectations are not aligned," says Leslie Dashew, president of the Human Side of Enterprise and a partner in the Aspen Family Business Group, a consulting firm in Scottsdale, Arizona, specializing in family businesses. "Don't leave it to assumptions."
Rivers suggests reviewing the business plan in as much detail as the audience merits, including exactly how much capital will be needed to start up and to keep going. Often, he observes, it's easy to forget about operational costs.
Treating family and friends just like one would any other kind of serious investor can head off arguments later. Kruzel advocates sharing information. "I don't care if you're selling it to your brother, sister, uncle, or mom, you should be making full disclosures to them: full financial statements, tax returns, projections," he says. "If they knew the hazards of this business plan, at least you could sleep at night knowing you gave them access to any and all information."
Dig Deeper: How to Structure a Business Plan
Pitching Your Business to Friends and Family: Evaluate Financial Eligibility
Private equity investors have documentation showing that they are qualified and they must demonstrate that the money isn't enough to take them down. Likewise, any family member or friend interested in the business proposal who wants to invest or loan money should be evaluated to make sure they are financially qualified.
"If you're starting a business, you've got a 20 percent chance of making it within a year," Dashew says. The risks are extremely high. She recommends putting the warning in writing: "I don't want you to invest if you can't afford to lose this." Should the business go under, not only are loved ones out of cash, but there is also the added guilt of having been responsible for setting them back.
