Friend looking for partner/investor in small homemade tea business - what should I ask/know?

by hew2702. Posted on Sep 17, 2020    2    12


I live in a moderately sized city with several small colleges. A friend of mine here, who goes to one of these colleges, wants to start a small homemade tea business, which he would sell at these colleges giftshops and at some of the many independent coffee shops in the area. (A couple small 1-2 person businesses already sell homemade items like this in the area).

He'd like my involvement in this, but I've never been involved in a "startup," if it can be called that. It'd be fairly small-scale (pretty much just him and his wife) so I'm not sure what questions and concerns I should have that I might ask someone trying to start a larger company.

Obviously, I want to taste the tea first and decide if it's good and might sell. But other than that, how can I be confident in a decision to invest/partner with him? And how would you suggest we decide how/when I can get money out? Thanks!


Comments

pixelrow 1

You should learn about the tea business. Normally there are a series of courses at the annual trade show. This year's tea tradeshow was cancelled but they are holding a virtual event in October and it's free. https://www.worldteaexpo.com/virtualsummit

  hew2702 1

Oh nice, thank you so much for this!!

PrimaryWarning 1

I'm assuming endgoal is to make a few hundred grand a year and not be acquired by Coke or someone else. If so then this isn't a startup but a microbusiness. Make sure they have a solid business plan and you all form a solid partnership that includes roles and responsibilities. Get pricing and costs estimated before you partner. Expect to put more money in year 1-3 then take a return 4-8.

  hew2702 1

Thanks for the timeframe, that's really helpful - and for the correct term. I'd say his goal is even smaller than that, so definite emphasis on the "micro" part. I've read elsewhere on this sub that business plans are good but having a product that sells is more important to prove first. I was thinking of having him get his product out for a little while, maybe a couple months, and see how it does. If it does well, then he can develop a plan to scale and if I like the plan I can help financially. Does that sound reasonable?

PrimaryWarning 1

For partnerships having business plan and clear partnership agreement might be the most important thing. I'd also be concerned with their valuation as most think their idea is worth millions when it's basically worthless.

  hew2702 1

Understood. Thankfully, his vision is pretty small for the foreseeable future, but I imagine especially with friends it's good to have very clear agreements and plans in place. Thanks so much for your advice!

lawdofthelight 1

I’d start by understanding the potential scalability of the business. If you invest X amount and you do establish different scenarios of return (high end of 10x I vested capital, low end of 0, middle of 3x), you can then compare that to other forms of investment, such as stocks, crypto, or other businesses. As far as when you’d get your money out it’s really what you’ll be able to negotiate with your friend. You could both lock up your invested capital for x amount of years and/or vest over a number of months. It’s really up to you and the level of involvement and risk you’d like to take.

  hew2702 1

I like that idea of comparing to other investments, didn't think about looking at it that way. Pardon my very novice investment experience, but is it unheard of or unreasonable to invest with the agreement that we split profits a certain way (e.g., 50/50) for a certain amount of time and then review our situation?

lawdofthelight 1

If you can get it in writing in the operating agreement, then you can do whatever you agree to.

  hew2702 1

Fair point.

hollth1 1

Not that uncommon where I am for profit sharing to vary, BUT you need to be careful about the review in X amount of time. What happens if you don't agree?

  hew2702 1

I suppose we could agree to a profit sharing option until I receive X return on my investment instead with the option to reinvest after or something along those lines. That seems more agreeable up front, imo.