Why Companies Seek For Silent Investor?
A company seeking capital or funding has various avenues. These include taking up debt from a bank or seeking a venture capitalist. Notably, the latter only accepts offers from a promising business. Moreover, the compensation for the investment is often in the form of an equity stake in the company.
An equity stake means that the venture capitalist has a say in the decisions the company makes. For this reason, another funding approach exists. The company may choose a silent investor. So, who and what is a silent investor? This article aims to answer this question by elaborating on the dynamics involved.
Who Is Silent Investor?
A silent investor is also referred to as a silent partner. Such an individual provides funding to a business but is not involved in the day-to-day running of the firm or business. Depending on the arrangement, the silent investor may earn a certain percentage of the profits or revenue earnings. The individual, therefore, earns or makes money. Alternatively, the investor may be allocated shares in the business. In this regard, a silent partner is compensated for providing capital.
Silent partnership takes two distinct forms, namely limited and unlimited partnerships. In the former category, the investor does not participate in management but is responsible for the company’s loans and debts. Importantly, the liability is up to the amount of money the investor has put into the business. The management role is left to a general partner.
The latter, on the other hand, is rare when it comes to silent partnership. It relates to an investor who is both liable to debts and runs operations. In this case, the investor is responsible for all the debt regardless of the amount invested.
Importantly, the silent business partners’ contribution transcends funding. In some instances, they provide guidance and advice when needed. Also, those that have a vast network of connections provide their businesses with the contacts needed to expand the novel companies.
How Does Silent Partnership Work?
Firstly, the company or business should be duly registered according to the regulations of the country. There are two approaches to company registration, either as a limited liability partnership or a general partnership. In the former, only one of the parties is concerned with the running while the silent investor is exempt. In the latter, everyone is involved in management.
A successful partnership is anchored on a solid agreement between the parties involved. A business seeking a silent investor should draw the terms of the agreement and have them in writing. The terms should cover every aspect clearly to avoid confusion later on. Furthermore, having the agreement is crucial as it acts as a reference. The agreement details each parties’ functions. It also contains a summary of the earnings of the silent investor.
Investing in a business as a silent partner requires the individual to establish whether it will be a limited or unlimited partnership. That way, the investor is cognizant of the future obligations and liabilities within the person’s portfolio.
Pros Of Silent Partnership
- Silent partnership helps a business avoid getting into debt since the investor provides capital.
- Experienced silent investors provide guidance on how to conduct business.
- A silent partner with a network of connections avails contacts that are crucial for the expansion of the company.
- The fact that a silent partner is not concerned with the daily running of the company limits the probability of friction and disagreements occurring.
- The silent partner stands to gain passive income once the business expands. This is particularly attractive since the investor is oftentimes not concerned with management.
Cons Of Silent Partnership
- Lacking a say in the daily operations implies that the silent partner does not have control over the investment. The issue is further compounded when the investor does not agree with the decisions that the general partner makes. The investor is, therefore, exposed to risks.
- It may be difficult for the general partner to obtain additional funding from the silent investor. This is particularly true since the detachment of the investors from running the business implies that they do not struggle to keep it afloat. They may not be willing to put in more finances since such a move may expose them to additional risks.
- If a silent partner entered the partnership with the intention of selling their stake in the future, they may not have control over how much the business is valued. This is because they do not have a say in how the business manages its liabilities and assets. The investors cannot influence decisions that will maximize the company’s valuation. As such, they are unable to realize short- or medium-term improvement in what they had initially invested.
- A silent partner can only claim the business’ assets to recoup the capital invested once the company has paid all its debt. Such an individual is susceptible to losses in the event the firm is dissolved without repaying loans.
Closing Words For Silent Partnership
A silent partnership is both risky and rewarding. An investor should first understand the dynamics of the arrangement and come to an agreement that will be beneficial to all parties. Notably, a silent partner stands a chance to earn money without going through the trouble of running a business.
However, it is also risky, because silent partners may have not any control over business. Thus, silent partnership is not only about profit, but also about strategies and hard work.
Silent partnership is only possible with a limited partnership arrangement. As such, the first prerequisite is entering into a limited partnership arrangement with another individual. In this case, the other person will become a general partner. Their mandate will be to manage the business. Furthermore, the silent partner should not forget their role. They should provide funding, provide guidance, and use their contacts to help the business grow.
A silent investor is not involved in the daily running of the business. They only provide funding. This becomes appealing to a wealthy individual who is usually too busy to perform managerial duties. Despite this fact, they still provide guidance and advice and expand the business through their connections.
The first step is creating a solid business plan that details the actual revenue projections. The plan also shows the streams of income which will help the investor recoup their investment. A silent investor is only likely to come on board if they see that your business is promising. Upon drafting a plan, you can look for wealthy individuals who are referred to as angel investors. Alternatively, one can ask friends and family members who believe in the vision. Notably, it is only by making the business desirable that one is likely to land a silent investor.