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How to Fund Your Franchise Acquisition

You've just decided to explore investment opportunities in franchising, but before you can even begin to think about all the exciting times (and hard work) that await you, you encounter the giant barrier that even the most highly qualified would-be franchisees (and small business owners everywhere) have run into countless times before: financing the purchase of your new business.

Financing the Purchase of a Franchise

Even if you have all of the required start-up capital sitting in your bank account, and even if you have mentally prepared to invest a considerable sum into a franchise, you may be wary of risking your very bottom dollar for the new venture. There are alternatives, including raising debt or equity funding, but both of these options come with a set of benefits and drawbacks that you'll need to weigh carefully before committing to any particular path.

Expect to get an earful from everyone as you ponder your financing choices: the franchisor will have guidelines and suggestions; friends and family will offer opinions; and, of course, nearly every small business owner you meet will have a war story or tip to share. While it can be helpful to consider the wisdom and experience of others, it's crucial that you remember you've chosen to put yourself in the driver's seat of your own business, and few decisions will be more important to the long-term success of your venture than getting it right when it comes to financing the initial investment. 

Read on to better understand your universe of financing options as a new franchisee and how you should think about making this critical decision.

Identify the Best Source for Financing Your Business

“It is better to lose the friend than the house” – Anonymous

This old saying speaks to the risks associated with starting your own business. The chances of success and failure are equal and relying on certain types of financing may lead to problems should the venture not offer fruitful returns. Often times, rather than relying on a single means of financing, it is recommended to have a financial package which is made of different pieces of financing options. The primary options for financing is usually evaluating how much the owner themselves are willing to contribute to the venture while leaving a certain percentage for themselves as a safety net.

Following personal financing, the owner may choose from obtaining capital from a variety of sources such as turning to friends or family, approaching other investors, using franchise system financing, taking out loans from banks, government programs, seller financing from the previous owner in the case of a resale of a franchise, lines of credit, home equity loans and approaching venture capitalists are just some of the means of financing available. These financing options are discussed in detail in other articles which can be accessed from the website.

Rather than simply start trying to raise the necessary capital, it is advised to take a realistic look at the financial burdens associated with running the franchise. You have to realize that no matter how much business acumen you possess, it would still be very difficult to raise $750,000 investment for a large franchise, if you have hardly any capital of your own to invest or previous exposure to the industry.

Recognizing the Franchisor's Financial Requirements

Franchise systems have their own financial requirements which prospective franchisees must meet to join their franchise family. 

You'll want to be sure that the franchise you have your eyes on sits within the realm of your financial capabilities. No matter how passionate you may be, the franchisor receives numerous applications from similar minded individuals with high dreams and must have some criteria to recognize qualified candidates. 

Examples of franchisor requirements for franchisees

You can see how the financial requirements can encompass total net worth, liquid assets, and other components.

Del Taco, a fast-food restaurant system, requires franchisees to have a minimum net worth of $2,000,000 and minimum liquid assets of at least $250,000. A prospective franchisee must also develop a minimum of five locations to be granted a franchise. Franchisees are also required to have substantial quick-service restaurant operations experience.

Valvoline Instant Oil Change, an auto aftermarket service, generally requires that individual licensees show a net worth of $200,000, exclusive of equity in her or his primary residence, with $100,000 of that $200,000 in cash, marketable securities or other liquid assets. Corporate and partnership licensees are expected to show the capacity and liquidity necessary to make the investment required, using the net worth and cash equivalent figures noted above.

Checkers Drive-In Restaurants require that prospective franchisees have a minimum net worth of $500,000 and minimum liquid assets of $200,000, excluding personal residence.

When a Franchisor Files for Bankruptcy

This article provides a brief history of some well-known franchisor bankruptcies of recent years -- including Denny's, Bennigan's, Steak & Ale, Original Roadhouse Grill, Cork & Olive, The Ground Round, Church's Chicken, Popeyes, and 7-Eleven -- with a look at the outcomes of these bankruptcies for both the franchisors and their franchisees.

Strategic and Structural Alternatives to Franchising

These are difficult decisions. The solutions are not clear cut from a business or from a legal perspective. It is critical that a company in this position work with qualified counsel to identify an alternative that will have a reasonable basis for an exemption and still make sense from a strategic perspective. The balance of this chapter will look at the many alternatives currently being tested by many U.S. and oversees companies. As you can see, the lines of demarcation are not always clear. The differences between many of these alternatives may in fact be in name only. Some of these concepts are truly innovative and have not been truly tested by the courts or the regulators. In these borderline cases, a regulatory “no-action” letter procedure is strongly recommended. Other concepts are not very innovative at all and merely borrow from long-recognized and analogous legal relationships such as chapter affiliation agreements in the non-profit arena or network affiliation agreements in radio and television broadcasting.

Big Sandwiches Equal Big Profits at Potbelly's Sandwich Works

The Potbelly’s train is firing on all cylinders and has successfully penetrated the uber-competitive fast casual sandwich sector. Potbelly sells a basic sub (PBJ, Pizza, etc) with relevant options (health, supremes) and offers an awesome dining experience. Their main target demographic is the lunch market, and their lunch lines are often out the door. Their menu includes soups, shakes and salads in addition to subs and the old-wood decor and live music make for a warm, neighborhood feel. Atmosphere is only the beginning though. Their products are well-crafted and satisfying. The quality of their ingredients is a cut above, yet price remains similar to that of their competition.