If I were to invest $40,000 to help start a trucking business, what type of return should I expect on that $40,000? I’ve never done this before and want to be fair to everyone involved. As an investor, what kind of return should I anticipate?
Being fair to everyone involved starts by being fair to yourself. You can buy a lot of things for $40K. Before you worry about what’s a fair return, ask whether there will be any return at all.
The problems here begin with the obvious fact that you aren’t a professional investor. You don’t have money set aside for investing in long-term returns; you’re looking to participate in a small company that has very little chance of ever generating the kind of return on investment that arms-length investors look for.
Furthermore, it may also be illegal. US stock laws regulate investments in new businesses and one of the more common problems it that you have to be a "qualified" investor. The law on this started back in the great depression. It was intended to protect people from getting suckered. You might be exempted under the "friends and family" provisions, but otherwise you have to have serious money or you’re not qualified.
So what’s the problem? Well, underneath it all, a trucking business getting a $40,000 investment isn’t likely to return money at all unless you’re a partner, and an employee, and you have a real voice, documented in writing, on what happens. These businesses normally live until the owner passes them on or gets tired, and they don’t get sold for the kind of money that gives an investor a return.
So here are some things to consider:
- Professional investors put their money into companies that can take off like rockets, because so many fail that they have to make their money back with the winners.
- What makes you think you’ll get any return at all? How do you, as an investor, get money back out? If you take ownership, like most investors do, then you get money back only if the business sells itself to another business or goes public, or is profitable and pays dividends. If you don’t have majority ownership then you can’t force any of those things to happen, you just have to sit aside and wait and hope.
- How much ownership are you going to take? $40k might be the full investment in a trucking business, or just a tiny percentage. Will you have control? How much?
- Is there a payback written into the documents, like a loan? Sometimes in these cases the investors get $60K or even $80K back in 3-5 years, plus substantial ownership (maybe even 100% if the business can’t make those payments). This can be done if it’s written up right.
- The worst payoff is minority ownership in a privately held small company. In that case, you have no say in the business, and no way to get any money back.
So I know this is not the kind of answer you’d like, but that’s what I think.