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.
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.
The Franchise Site & Franchise Location Selection Worksheet
Identifying the major traffic patterns, the availability of parking close by, the cost of utilities, the rent per square foot and various other aspects are just a few of the factors to consider when locating your franchise site.
Breaking Down Royalty Fees
When people think of the costs of opening a franchise they typically just think about the franchise fee. That makes sense, seeing as the franchise fee is typically a substantial cost, ranging from a few thousand to a few hundred thousand dollars. But, this isn't the only payment a franchisee needs to make to the franchisor. Once operations start a franchisee typically needs to pay some form of ongoing royalties to the franchisor.