Funding Your Future Franchise

It’s no secret that the current economical climate has affected the franchise world for good and for bad. On the “good” side of the spectrum, people who have been content working for others are re-evaluating their professional options. If you own your own business, you have greater control of your future and are able to reap your rewards instead of passing them to your boss.

On the other side of the spectrum, you have the negative effects. This can be summed up in one word – funding. Across the board, getting loans and funding for anything from a home to a car to (of course) a business is harder than it has been for decades. However, that certainly doesn’t mean you should throw in the towel. If you’ve found a franchise opportunity that’s the right fit for you, then there are still ways to get the funding you need. Here are some things to remember as you start the process:

Choose the right franchise:
When you are looking at franchises there are a few things of which you need to be aware. If you’re going to be an owner operator, make sure you like the work. Talk to as many franchisees as you can. Be objective about what your return will be.

When it comes to funding, there are 2 very important things to look for:

SBA Approval:

If you are considering buying franchises, focus on those that are SBA approved.  The SBA approval increases the franchise’s legitimacy in lenders’ eyes and, generally speaking, makes it easier to find funding.

Franchisor Financing – Look for franchise concepts where the franchisor is willing to do seller financing on the franchise fee. This is becoming more common in today’s market, and it will help decrease the amount of capital you need upfront.

Be prepared:
Getting funding is not a casual matter. This means you have to get your act together before you start applying for loans. Too often people try to get funding before clearly identifying their financial needs, so one of our recommendations is to develop a strategy that includes several financing options.

Have a business plan in place, but also a finance plan – Who are you going to go after? Do you know how much you’ll need?  What are your pro forma projections? These are things that a good franchise system will help you get together. Knowing that information will save you time and increase the likelihood that you will get funding for your franchise investment.

Talk to other people who have raised money and ask them how they got it. What hoops did they have to jump through to get it? This may help you avoid major pitfalls and may also help you create the connections that can make all the difference.

Break it down

One thing to remember when buying a franchise is that the investment can be broken down into several categories. Rather than trying to fund the entire investment from a single source, you may want to consider funding the various parts of the investment individually. Your investment is typically broken down into categories such as franchise fees, real estate, equipment and other start-up costs. Here are some examples and breakdowns of how to go about securing funding:
Franchise fee – You should be able to negotiate seller financing with the franchisor, especially in this downturn economy. Franchisors are trying to sell more franchises and they’re probably willing to cut you a deal.

Equipment – Because this is usually a hard asset, this is something that is easy to get a loan against because it can be collateralized. You should try to get a lease agreement with the bank to finance that over three or four years.

Real Estate – With the downturn in the real estate economy, you should go to the owner of the building and ask for tenant improvements and ask for him to finance this portion of your start-up costs.

Choose the right lenders

Once you’ve found the right franchise, prepared a well-thought out business plan and broken down your costs, it’s time to find the money. There are many different types of loans and leaders you can appeal to.

Love loans:

These are loans from family or friends. It’s not unusual for a parent, grandparent, friend or neighbor to be willing to help you raise your needed collateral by investing in you. In fact, with the economy and job market on the ropes, many parents are buying franchises for their college graduate children to run. This provides their child a job with real business experience, while also receiving a better return on their investment than the current market could render.  Be forewarned, although these can be some of the easiest loans to get, they can be the most costly (in many different ways) if things take a bad turn.

Local Banks and Credit Unions: There is a lot of research highlighting ways the credit crunch has hurt big banks, but in most cases, local and regional banks haven’t been hit as hard. If you are a member of a local bank or credit union make an official presentation (see Be Prepared). Local financial institutions are much more likely to help local customers opening local businesses.  That being said, you go in expecting to have to give a personal guarantee.

State Programs:
A recent report by the IFA Educational Foundation determined that for every $1 million of lending obtained by franchised businesses, 34 jobs are created and $3.6 million in annual total economic output is generated. These are the types of numbers state and local leaders like to hear. Some states have special programs for small business owners to receive funding if they invest back into the community. Talk to your local representatives and see what options are available to you. 

Severance Package:

Some of you reading this might be looking at buying a franchise because you are out of work due to the massive number of layoffs happening across the country. If you have a severance package, use it to fund a franchise purchase. It might be the best investment you ever make.

Finding funding for a franchised business is still much easier than starting on your own, but there is still a lot of work that goes into finding it. The bad news is that franchise sales are down nationwide because of this. The good news is that this means that those who are able to find the funding are much less casual about their investment and more prone to success.

So, if you’ve found the right franchise, and you’re willing to work at it, you can find the funding.

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How to Succeed as a New Franchise System

This is an article written for by Sara Wilson with Christian Faulconer contributing.

It was only last June that Allison O’Kelly started offering Mom Corps, a staffing company, as a franchise opportunity. However, in that brief time, O’Kelly has learned a lot. In the life of a franchise, every year is important. However, there’s nothing quite as crucial as that first year in setting the stage for what’s to come. So what’s the secret to making it past Year One as a new franchisor? We asked O’Kelly how she did it, and talked to franchising experts about what sets successful franchise systems apart.

1. Choose the Right Franchisees – and Give Them the Right Kind of Support

O’Kelly spent much of the first year talking to and listening to her franchisees. She then used the feedback that she received to fine-tune the franchise program so it would better meet their needs. “We wanted to use that period to refine our program, to ask ourselves, ‘What are we doing right? What are we doing wrong?’” says O’Kelly.

In Year One, O’Kelly also learned the importance of choosing the right franchisees to represent the brand. “Don’t bring candidates on [just] because they are willing to buy a franchise from you,” she says. “Only let the right franchisees in.”

O’Kelly was correct in prioritizing the needs of her franchisees. Christian Faulconer, CEO of Franchise Foundry, a franchise development firm, says that providing support to franchisees is crucial. “Your first franchisees are critical to the success of your system,” Faulconer says. “It is important to put support and communication mechanisms in place in order to ensure that your franchisees get the training and support they need and to make sure they have a way to voice concerns. This will improve the franchise system and will result in franchisee validation, which is critical to your ongoing sales efforts.”

Tim Howes, principal of Spyglass Strategies, a franchise consultancy practice, recommends developing an intranet system for optimal communication. “Possessing an intranet is a great start for younger franchise systems,” he says. “Keep in mind that when you’re new to franchising your concept and you’re training franchisees, there are bound to be gaps in the education process. As these franchisees ask questions, incorporate the answers into the next franchisee’s training.”

2. Tackle the Legal Side Early On

One of the key lessons that O’Kelly learned in the first year is that having a really good attorney on board is essential. This is one lesson many new franchisors don’t learn until it’s too late. “I think the most common mistake people make in their first year is they don’t get their disclosure document done right,” says Faulconer. “It is very common for us to see emerging franchisors that have legal messes to clean up because they sold franchises in states they weren’t registered in or they sold without a compliant disclosure document. These mistakes are time-consuming and expensive to fix, and in some cases they can kill the system.”

In addition to modifying the franchise program in order to better support her franchisees, O’Kelly also modified the franchise agreement, particularly around royalty and termination structure. “We realized that there were a few things in our franchise agreement that we would change,” she says. “We did our annual update and provided our current franchisees the opportunity to add an amendment to their current agreements.”

3. Take the Time to Create Lasting Systems

Systems are the main determinants of the life expectancy of a franchise. While some systems can’t be established until the franchise is up and running so that the kinks can get worked out, other systems are fundamental from the beginning. “One of the keys to a successful franchise is a proven and profitable system,” says Faulconer. “Some companies try to franchise before they have built a system that works. The most successful franchise systems have a repeatable business with a track record of success before they sell their first franchise.”

Often, in order to create the best systems, additional skills or talent needs to be brought on board. Franchisors need to be aware of this and take the necessary measures to improve the health of the franchise. “Many year-two systems try to juggle [running] corporate locations, serving existing franchisees, and recruiting new franchisees,” says Howes. “Some systems aren’t willing to invest early on in management because of cash constraints. Big mistake.”

Franchisors also need to remove their ego and act in the best interest of the franchise and its franchisees. “[One of the] most common mistakes is entrepreneurs aren’t willing to change their system for emotional reasons,” says Faulconer. “It helps to be very analytical about your business, its strengths, and its weaknesses. You should be willing to adapt intelligently to make the system better.”

There’s one thing all major franchises like McDonald’s, Dunkin’ Donuts, and Subway have in common. They all survived Year One, and they did so by creating a franchise system that would continue to endure even in a changing world. By building a solid foundation and taking the time to focus on the details and the success of your future franchisees, you can ensure your Year One is just the first of many years to come.


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