10 April 2014

Should you be a silent partner?

We explain what a silent partner is and why you might want to consider being one over a fully involved business partner.

Silent partners provide funding for a business, in return for a proportion of the profits (or losses) but aren’t involved in its day-to-day running.

This can be a good option if you want to invest in a business because it’s a passive income. You don’t need to have any expertise in the company and you don’t need to put in any of the time or hard work that a small business typically takes to get off the ground and grow.

Often, silent investors (also known as sleeping partners), provide money to friends or members of their family. Whether it was your suggestion or theirs to strike up a partnership, make sure you know exactly what’s involved, and that you separate your personal and business relationships.

Trust is key

First and foremost, you have to trust your partner. As you won’t have any say in the routine workings of the business, you need to be certain that they know what they’re doing. And just because they are particularly skilled at what they do, doesn’t necessarily mean they have the right expertise to manage a business. It can be particularly hard to be objective if it’s a close friend or family member, but it’s important that you assess this as a business proposal.

Even if you have the utmost confidence in their abilities, things can sometimes go wrong. Are you capable of trusting them to get the business back on track without interfering?

Get legal advice

You should arrange for a contract to be drawn up to make sure both parties know where they stand. How much of a return on your investment will you receive – what proportion of the profits will you be entitled to? How long will you be a partner for – is it a long-term investment or for a limited period, with your partner planning to buy out your share of the business at a later date? These are all important considerations to make – you don’t want your relationship to go sour if one of you feels cheated when your financial dealings end.

Make sure you are aware of any liabilities and that you know any extra costs you may be responsible for, such as national insurance contributions. 

To summarise, becoming a silent partner can be a great opportunity as long as you are comfortable having a hands-off approach, trust your partner implicitly and have done your research and preparation beforehand.