There are lots of confusion on the meanings and applications of business terms such as silent partners and angel investors. Understanding what the terms mean and their inter-relatedness will be a great help to business owners.
This post will examine the distinctions between silent business partners and angel investors as well as analyze the entire situations under which they are applicable.
What Is A Silent Partner?
A silent partner is a business partner that funds a commercial startup. A silent partner invests his funds into a business without taking part in the day-to-day operations of the business. His liability in the business is limited to the capital or financial assistance he provides. This essentially makes him a limited partner; his risks are limited to his financial investments.
A silent partner is “silent” because he remains in the background and does not attend management meetings or take part in any physical activity related to running the business. He gives up operational powers to the active or general partner and does not influence the activities of the business in any major way. He may, however, help in other minor ways if called upon.
So a silent partner may also be referred to as a limited partner or a sleeping partner.
Finally, a silent partner is like a smartphone app that runs in the background – its functions are important to the overall operation of a device, but it runs in the background and does not interfere with the operations of other major apps.
What Is The Role Of A Silent Partner?
Having established that a silent or limited partner is fundamentally a financial investor, he may also carry out other functions necessary to strengthen the business. When called upon, he may offer advice, activate his contacts to assist the business, or even mediate when there is a crisis; but he generally remains silent and does not interfere with the operations of the enterprise.
Although a limited partner is not obligated to assist, he may have access to certain resources that can promote the business. These resources include business finances, legal attorneys, government contacts, marketing supplies, distribution channels, and collateral for loans when required to boost the business.
Silent Partner vs Silent Investor
While most business analysts agree that a silent partner is the same as a silent investor, they could be differentiated if the partnership agreement makes them distinct. What this means is that – to some people, a silent partner and a silent investor are one and the same person; but to others, they are two different people. This distinction depends on the kind of agreement that was entered into when the partnership document was created.
According to this distinction, a silent partner and a silent investor both provide funding for the business. But while a silent investor does not share in the risks and liabilities of the company, a silent partner does. Both of them are silent in that they do not participate in the daily operations of the business, but a silent partner shares responsibility for the assets and debts of the business while a silent investor does not.
How Liable Is A Silent Partner?
Going by the preceding section, a silent partner is liable for the debts and assets of the business if this has been specified in the partnership agreement.
What Percentage Should A Silent Partner Get?
The income of a silent partner is usually limited to his investment. This will have been spelled out in the partnership agreement. A silent partner or investor may earn 10%, 20%, or 30% of his investment depending on what the partnership agreement says. The amount of investment a partner has in a business is his stake – or his partial ownership of the business.
If a silent partner invested $50,000 in a business that is worth $500,000 when profits were declared, it means the partner will earn 10% of his investment since his stake is only 10%. Also, if a business is worth $1 million at the time of profit-sharing after a partner has invested $100,000, it means the partner’s stake is 10% and he will earn 10% of the profits.
It must be noted that this earning will only be arrived at after operational expenses have been deducted from the total revenue.
How To Find A Silent Partner For Your Business
Finding silent partners or investors for your business is not as hard as you think. You only need to look around and speak to certain prospects. You must begin the search from your circle of influence – family members, friends, neighbors, associates, and even strangers in certain cases.
People with extra money stashed away somewhere will be happy to partner with you once you come up with a viable business idea with operational structures well-outlined.
Friends & Family
You can reach out to wealthy family members and intimate them of your plans. Speak to friends who trust you and appreciate your commercial capabilities. One of the advantages of recruiting friends and family as silent partners is that they are less likely to take legal actions against you if the business fails. They will also exercise more patience if profits are not forthcoming at designated periods.
There are several online forums where rich investors source viable businesses to invest in. Many fundraising websites are also good for connecting with silent investors, and there are specific websites you can use online to get business capital and angel investors. You must understand that venture capitalist are also on the lookout for viable enterprises to invest in, so you stand a higher chance of meeting them when you source from the appropriate places online.
Partnering With Other Businesses
You stand to grow your business faster if you explore viable business-to-business (B2B) opportunities. You should look to partner with businesses that complement yours in terms of services, or that your service complements theirs. For instance, you can partner with caterers if you are into event management; and you can partner with car-hire businesses if you are into car-wash service.
The above silent partner investment opportunities can be expanded further depending on your type of business, aims and objectives. You only need to look around or speak with business specialists to identify silent partner opportunities around you. The good news is that compatible businesses are also on the lookout for you and you must initiate the steps to bring you all together.
How To Win A Silent Investor To Your Business
Having identified suitable business prospects or investor opportunities, the next step is to woo them. You mustn’t just approach anyone and tell them you want them to invest in your business; your business plan and revenue projections must speak for you. A document that demonstrates the upward growth of your business and what investors stand to benefit for many years will make people more willing to listen to you.
Pitch To Potential Investors
You must present an effective pitch by demonstrating your business concept, seeming challenges, competition analysis, product samples, and projected cash flow as well as potential benefits to investors.
Make Your Pitch Comprehensive
Your ability to attract angel investors or silent partners lies in how effective and comprehensive your pitch is. Some of the details that can make your pitch very convincing include marketing plans, profiles of key personnel, survey results, budget information, and anticipated funds for the breakthrough.
Be Upfront With Needed Funds
You are approaching investors or partners because you require funding, so that must be a key element of your pitch. Demonstrate how much you have invested, the operational costs of the business, and how much you need more to break even. Convince the potential partner that you actually need him and let him know what he stands to gain within the stipulated time frame.
Flaunt Your Successes
Demonstrating your business successes is critical to convincing your potential investors. In many cases, suitable partners or potential investors want businesses that are already up and running with a measurable level of success. They want to put their money in businesses that are already generating substantial income, and you must show off your successes to drive home this point.
Working With Silent Business Partners
Having secured your desired business partner, you must develop a working relationship that works best for you. This is best done in a formal way to protect yourself and all partners. So before you begin to work with your silent partners or angel investors, you must do the following:
Put Everything In Writing
Yes, draft a legal agreement that is enforceable in court with the help of a lawyer. Your investor may be your best friend, but a bad business eventuality may sour your relationship if you have no written agreement to recourse to. A good and transparent businessman does not leave anything to chance – so it’s best to draw up a contract that covers partners’ investments, profits, work responsibilities, crisis resolution, and arbitration among other things.
Analyze Potential Risks
It is true that you are desperate for silent business partners, but you must remain transparent in all you do. Before partners to the business sign the dotted lines, you must explain the risks associated with running and investing in the business to potential investors or partners so that they don’t feel scammed. Also, you mustn’t allow silent partners to invest more than they are actually willing to lose.
Manage All Expectations
Investors are willing to partner with you because they have expectations of financial rewards. You must manage these expectations by working hard to make your business profitable, or partners may be forced to request a buyout after a year or two. Your business must not fail and investors must keep on believing in you and in the business in order to raise the odds.
Becoming A Silent Partner And Investor In Other Businesses
Do you have extra funds stashed away and looking to become an angel investor or silent partner in someone’s business? Becoming a silent partner will make you a part-owner of another person’s business, but you can go about it in the following ways:
- You must have unused funds that you don’t mind losing in the long term: Every investment carries some level of risk, so you must only invest what you are willing to lose if the chips are down.
- Sign up for a limited partnership agreement: Since you are committing your money to the business, your risks and potential losses must be limited to your stake. You cannot inherit the losses of other investors.
- Enter into a legally-binding agreement: Some agreements are not binding or enforceable at law, but you must only enter into legally-binding contracts that can be pursued in the law courts if things go north. You must get a lawyer to witness it, and the business must be registered with the appropriate government agencies.
- Understand what you are getting into: You must understand the business risks and operational expectations before you sign away your check. Even though you are not directly participating in the running of the business, you must understand what is going on. You must discuss the risks of failure, compensation, crisis resolution, and legal remedies before you proceed to invest in the business.
Photo by Ivan Samkov