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OUT of the blue you receive an e-mail from an old friend to acquire an interest in his business. So have some other friends. You are interested, but are also apprehensive and suspicious about the invitation. Why now?

There could be different reasons why you have been approached. This you will have to give thought to. In doing so you must consider whether your sole objective is to get the benefits from the business or help a friend who is possibly facing temporary difficulties.

One scenario could be that the business is going smoothly and he made the offer with a general desire to benefit his friends whilst at the same time getting some or all of his initial capital back. If this is the case, then you need to consider the share you are getting against the amount you are investing.

Or, it could be that the friend needs capital to expand his business. But, if this is the case, you should ask why he cannot borrow the money from a bank where he has only to pay back the loan with interest rather than give up part of his interest in the business, which is what he would have to do if he offers shares to his friends.

Of course, getting a loan can be difficult. Have we not heard of small businessmen having difficulties in getting bank loans, but on the other hand, well-connected people getting huge loans which in some cases have led to serious defaults?

By selling a stake in the business, the friend reduces the burden of carrying a loan, whether or not the business does well in the future. If good returns are not forthcoming, he will have the benefit of not having to worry about paying interest regularly and also comply with the fixed time line within which to repay the loan. This will reduce stress and perhaps help him concentrate better in running the business.

If the business does well, then the profits paid out to you would be more than the friend just paying back the money and interest. He may well prefer the latter option for the peace of mind that he would have vis-à-vis repaying a loan.

Assuming the business is in trouble, then you will have to consider whether the money you invest will turn it around and make it profitable. Of course, you have to bear in mind there could be a risk of losing your investment partially or wholly.

Since you are going to invest your hard-earned money, you must evaluate the risk by asking questions: about assets, liabilities and contingent liabilities, among others. There should be full, frank and fair disclosure to allow you to assess the risk that you may be exposed to and its extent.

If you decide to go ahead, what are the possible legal aspects that you need to be aware of?

You must find out if the business is a partnership, sole proprietorship, or a company incorporated under Companies Act 1965. Businesses registered under this Act are usually recognised by the words “Sdn Bhd” at the end of the company name.

A greater risk is involved in the case of becoming an investor in a partnership. This is because in the case of a limited company your liability will be limited to your investment, which is the number of shares you take up and agree to pay for. If it is a partnership, though, the liability would be unlimited. So even if you decide to invest RM50,000, you could, if the business collapses or fails, be liable for the entire debt regardless of the proportion of your shareholding.

It is always preferable to have a company structure so that you are aware that a loss, if it occurs, will be accordingly limited.

But, even then, one needs to be careful when it comes to guarantees. If, for example, you become a director, an occasion may arise when obtaining a loan facility may require all the directors to be guarantors. This can expose you to liability well beyond the investment that you hold and may be out of proportion to your interest in the enterprise.

Thus it will be seen that a variety of complexities are involved in taking up an offer to have a stake in a business. At the same time, such an offer need not be summarily turned away. It could be a genuine opportunity to have an interest in the business.

It should therefore be carefully considered and approached with a real understanding of all the issues involved. Just because it looks too good and has come easily should not be a reason to stay away.       

In life, there are situations which are sometimes opportunities or pitfalls. When this happens, some people may not see a pitfall while others may let an opportunity pass by.

Whenever a person invests in a business or lends money to another, there is always a risk involved. However, the only question that needs to be addressed is how big the risk is, and whether you are able and willing and prepared to take the risk.