No parent wants to watch their kids struggling and begging for scraps in the job market. But it's a painful reality that hundreds of thousands of Mums and Dads all over the country are facing.
The UK jobs market is tough, and competition for posts is fierce. There are only so many application rejections young people can take before they start to blame themselves instead of the system. And that's why a growing number are ditching conventional career paths to become their own boss instead.
Two thirds of the new jobs created since the financial crisis, have come from people becoming self-employed, according the latest data from the office of National Statistics. More than 16 per cent more 16- to 24-year-olds are working for themselves than in 2009, with 172,000 of them now officially registered as self-employed.
But setting up a business requires capital - the one thing most young adults don't have. Interest rates are on the floor, which means that banks are relatively unwilling to lend to them. The lack of bank lending since the financial crisis is a major reason why crowdfunding websites such as Seedrs and Crowdcube are now popping up all over the internet. But if they don't fancy paying a premium to dish out portions of their business to complete strangers, where else can a young person with the talent, the business plan and the drive to succeed acquire the capital they need to get their business off the ground?
The answer is the Bank of Mum & Dad. For parents who can afford it, acting as a business angel for their children could prove to be a worthwhile and profitable investment. After years of forking out for school fees, sports clubs and pocket money, could parents and grandparents of entrepreneurial kids finally be in with a chance of making some mutual profits? For parents eager to help their kids succeed, investing in them might seem like a no-brainer. But don't be fooled. Mixing investing with family is also riddled with potential risks and difficulties.
Tread carefully before investing in your family
Aside from having the potential to lose a lot of money – a badly handled business investment could cause lasting damage to family relationships. That's why parents planning on investing in their kids' ventures need to go about it very carefully if they want to avoid disaster.
The first thing parents should do is consider whether they can first of all afford to become the Bank of Mum & Dad. The amount it costs to set up a business varies wildly. The average cost of starting an online business costs just £325 according to Freelancer.co.uk, while Opinium Research says the average cost of setting up a micro-company is more like £41,000.
It is sensible to work on the assumption that you will lose all of the money you invest in your child or grandchild's business, and work out whether that would affect your day-to-day living standards, according to Kay Ingram, a financial planner at LEBC.
"The worst thing would be to worsen your own financial situation to help a relative, as it could cause tension within the family. It's best to keep investments a professional business arrangement. I've seen families fall out over poorly planned investments, so I tend to advise people not to make promises of investing or lending money they are not willing to lose," she said.
Investing vs a loan
There are two ways to help your children and grandchildren out financially if they are starting their own business: buying shares in their company and loaning them money. Investors who buy shares in a family company should draw up a shareholder agreement with the help of a legal expert. Investors should discuss with their children and grandchildren what would happen if the company dissolves, is taken over, or if it makes profits. Investors can also outline limits to what the director can buy with their money, which could stop a young business owner getting carried away and paying themselves a large bonus in their first year, for example. As with buying shares in any small company, they could rocket in value if it does well, or you could be left with nothing if it becomes insolvent.
The second option is to loan children or grandchildren money, which they can spend on building their business. As with buying shares, you should seek legal advice and get a loan agreement written up, in which you can outline spending limitations, if your family member agrees.
Ms Ingram recommends parents and grandparents should not let their relatives think writing a loan off is an option, even if they would be willing to, as they could run the risk of de-motivating their younger relatives.
Just like any professional loan, parents and grandparents should negotiate an annual interest rate. They might want to match the best bank rate, or agree to a lesser rate to make life easier for their kids or grandkids.
The pros and cons of family investments
One of the major upsides with investing money in a family member's business is that you can use your skills and experience to be an active investor and (hopefully) have a positive impact on it. Young entrepreneurs tend to be full of energy, enthusiasm and ideas, but they often lack experience and knowledge of how to manage a company's finances. But if you have business and investing experience yourself, you may be able to guide them and help them avoid the mistakes often made by inexperienced business owners, potentially giving them a better chance of succeeding.
There are many upsides to keeping investment money within the family, however, one downside is that you may not be able to receive Enterprise Investment Scheme (EIS) tax relief or Seed Enterprise Investment Scheme (SEIS) tax relief on your investment, as you would if you invested in a small business run by a third party. This disadvantage may cause some parents and grandparents to consider a loan agreement instead of an investment.
If an investor is in control of the company, or holds more than 30 per cent of the share capital or voting rights, HM Revenue & Customs deems them to be 'connected' with the company. If you are entitled to more than 30 per cent of the assets in the event of a winding up you are also connected; and entitlement to assets and loans to the company are also taken into account.
Philip Rhoden, a director at Clubfinance, says: "Parents and grandparents need to check whether they are deemed to be connected with an (S)EIS company because of their child’s or grandchild's interest in it.
"If they are connected, this means they aren't eligible for the (S)EIS Income Tax Relief, SEIS Capital Gains Re-investment Relief and Capital Gains exemption on disposal. However, even if connected they should still be eligible for Capital Gains Deferral on EIS shares and in some cases Loss Relief on disposal."
Comparative EIS & SEIS tax reliefs at a glance (for tax year 2014/15)
|Income Tax relief||50%||30%|
|Minimum holding period||3 years||3 years|
|CGT re-investment relief||50% of the gain||No|
|CGT disposal relief||Yes||Yes|
|Income loss relief||Yes||Yes|
*1 Investment can also be carried back to use the prior year's limit.
*2 Investment can also be carried back to use the prior year's limit. There is no upper limit on EIS deferral other than the investee company £5m limit.
CGT = Capital Gains Tax
IHT = Inheritance Tax
Qualifying company rules
|Max number of employees||24||249|
|Gross assets before issue||£200k||£15m|
|Max fundraising||£150k||£5m pa|
|Years since trade commenced||< 2||n/a|
|Genuine new business rule||Yes||No|
|Exclusion if previous EIS/VCT investment||Yes||No|
"If my son sells enough Haggis I'll make 8 per cent a year"
The restaurant trade is a notoriously risky business. Nine out of 10 fail in their first year. But Jack McVitie has no doubt in his mind that his son's Edinburgh-based gastro pub, which has been open for 18 months, is destined for long-term success.
He says he's not usually an investor with an appetite for much risk. He'd never consider investing in small start-ups run by third parties, say. But he's loaned a very substantial amount of capital to his son to help get his business up and running.
He's so confident the restaurant will do well that he's hasn't discussed what would happen to his repayments if the business failed. His son has a good grounding in the restaurant trade and flair for catering but lacks real business experience. Mr McVitie is a self confessed newbie when it comes to catering, but he has wealth of experience in business, having run a profitable financial services firm himself. And of course he also has the all important ability to stump up a substantial loan amount.
Mr McVitie says: "I see my main job as being the bank. My son had all the soft stuff worked out in his head - he has a vision for the place. But when it came to the business admin side of things, I knew much more and felt the need to step in. I put him in touch with an accountant I rate highly who helped him sort out a proper business plan, and I helped out with the cash flow modelling."
"In return for me stumping up the capital to buy the leasehold, we agreed my son would pay me an 8 per cent interest rate on my loan. It's slightly less than what he'd pay in interest to the banks, but I also wanted a fair return on my money, so it's a good deal for both of us.
The pair agonised over a number of properties before they settled on their Old Edinburgh-based restaurant of choice, which they named 'The Mercat'.
"The hardest thing about this whole process was being honest when I thought something wasn't right. We viewed so many buildings before we found the right one and I had to say "no" quite a few times. It was tough but I felt it was in everyone's best interests," Mr McVitie confesses.
Mr McVitie's youngest son, who is a trained chef, is also contributing to the restaurant. He has helped put together the menu, off which the best-selling meal is a Haggis-based dish, which Mr McVitie says is "very popular" with tourists. But whether The Mercat will sell enough Haggis to provide Mr McVitie with an 8 per cent a year investment return: only time will tell.
Top tips for investing in a child or grandchild’s company
• Do not invest money you cannot afford to lose – and remember small businesses are very high risk investments, even if you believe your child or grandchild has a high chance of succeeding.
• Make sure a proper business plan is in place before you agree to invest any money, and if you don't think it is viable, don't invest.
• Call upon your contacts – if they won't listen to you, hook them up with people you know and trust who can help them out. These could be friends or your own business contacts, and you could even consider offering your expertise to their kids or grandkids in return.
• Agree an interest rate on your loan that suits everyone, and even if you would be happy to lose all of your investment, don't tell your child or grandchild, as it could de-motivate them.
• Ensure you treat all of your children/grandchildren fairly. If you have other children, you could offer to help them out to the tune of your investment, or you could consider deducting the loan value from their inheritance in your will.