Silent partner, in the financial sense, is a part-owner of a business but chooses, usually for a good reason, not to play a public or active role in the daily affairs of the company. Since they also own a part of the company, they are definitely entitled to a share of the profits generated by the business operations of that company. The percentage of profits that a silent partner is entitled to largely depends on the terms stated in the partnership agreement.
Why a Silent Partner?
As previously mentioned, a silent partner is a business collaborator who has a stake in a company but does not have any public involvement with it. Generally, a silent partner does not involve himself with the day to day affairs of the business and is only referred to as simply a shareholder or an investor.
Also often called a limited partner, a silent partner’s liability is normally limited to his investment to the company. In a sense, while the silent partner can potentially lose the money he invested, he cannot be held responsible for the obligations of the company.
There are a lot of reasons why a part-owner of a company may opt to become a silent partner. It is possible that such investor may only want to invest capital in a particular company and earn from its growth without actually participating with its business operations.
There are also those who wish to be silent partners because they wanted to keep their wealth under wraps or perhaps because they do not wish to be seen by other entrepreneurs as a good source of funds. This simply means that they want to invest their money in companies but they do not want others to know that they have the financial capacity to do so. By opting to become silent partners, they can invest without being known as a wealthy individual and thus, avoid becoming a target for others who might incessantly bug them about backing or supporting other ventures.
In some cases, a silent partner may want to invest his money in a startup but do not want others to know that they are doing so because knowledge about their involvement with the startup might interfere with the company’s long-term business model. For instance, a car manufacturing company may wish to buy a stake in an emerging brake systems company in the hope that it will be able to incorporate the system into its automobile line in the future. If the competitors become aware of this, it might tip them off on the future business plans of the car manufacturing company.
Having a silent partner on board is also beneficial to other partners within the company. The known partners of the company will benefit from the entry of additional capital from the silent partner and at the same time, get to maintain their operational control over the company. In effect, the named or known partners will be the ones making all the public decisions for the company but will have an additional person on board to share the risk with.
There are those who think that a silent partner does not have much responsibilities to the company he invested his money into. In reality, however, a silent partner sometimes has to step up to help the general partners in their decision making and also help keep the business going.
What are the responsibilities of a silent partner?
The silent partner’s responsibilities differ from that of the general partners. Among the major responsibilities of a silent partner are the following:
1. To Provide Funding
- The main responsibility of a silent partner is to provide funds to establish, as well as sustain, the company over time. They may be called upon to provide funds on a regular basis, especially during the initiation of the business.
2 .To Attend Partners’ Meetings
- Sometimes, a silent partner may be requested to attend meetings with general partners to discuss the company’s investment needs.
3. To Assist in Resolving Disputes
- While it is true that silent partners do not involve themselves in management affairs, they may be sometimes asked to step in to resolve any disagreement between general partners which might cause the demise of the company. A lot of businesses ended because of a gridlock between two partners. Under such circumstance, a silent partner can step in and assume the role of a neutral party in conflict resolution meetings before the opposing partners go to formal mediation.
4. To Assume the Role of a Mentor
- A silent partner can also assume the role of a mentor or guide, particularly when requested by general partners, to provide a valuable insight and expertise in crafting business plans for the company.
How to Find a Silent Partner
Having a silent partner come on board your business is a great way to obtain financing without jeopardizing control of the company. In most cases, a silent partner will agree to put money into your company without assuming any authority or voting rights.
If you want to attract a silent partner to your business, you might first want to create a professional business plan that centers on revenue projections. A lot of investors put their money in a company because they are very excited to become involved with a new business. In contrast, a silent partner usually focuses on the return on their investment, mainly because they have no actual interaction with the company. So try to create a business plan that demonstrates how your company can create a positive cash flow within a reasonable time.
You might want to approach some members of your family or friends. Since they already know you, they should have trust and faith in you. Try to round up your friends and family and tap them for various amounts. However, you must make it clear to them that they will not have voting rights or authority over the company. You can also try to approach angel investors. There are many wealthy individuals who can provide funds for business projects at the initial stage and who are amenable to becoming silent partners.
Some Tips to Consider When Talking To a Potential Silent Partner
Just like any other type of investment appeal, you have to demonstrate the desirability of your business, not only in its future plans but more particularly on its ability to generate profit within a reasonable period. An investor will be more willing to be a silent partner if you can make your business appear to be truly desirable. Developing a regular revenue stream, obtaining a major investment, and boosting the company’s image in the media can generate a favorable dynamic for your company, which in turn, can help you locate and attract a silent partner.