What’s the ‘Brass Tacks’ of Opening a Franchise?
Show Me the Money!
Each and every month we’ve been delving into the ‘ins-and-outs’ (not to mention ‘ups-and-downs’) of franchise laws. Agreements, contracts, and even laws that effect certain specialized industries have been covered. It is no surprise that there are literally thousands of franchise systems that are currently operating in a variety of industries, and there is no sign of a slow-down; nor is there a shortage when it comes to what industry you wish to ‘join’ with your franchise pick. Of course, with this amazing variety comes the fact that making the final decision on what you most want to do is difficult.
Anyone wishing to become a franchisee has a whole list of questions that need to be answered. From the hours you wish to put into the franchise to the amount of income you wish to make to whether or not a customer/retail situation is fun, or an operation where you remain behind the scenes is the path you want to take. But the key factor for becoming a franchisee will always be how much money you can invest and the amount of cash you can afford to borrow in order to commit to the franchise.
It is a fact that lenders will always look more favorably on funding franchises that exist in already proven markets. Which means a franchiser offering a well-known brand name, a great reputation and a positive track record of performance, is a must when you want to avoid a whole slew of problems. In addition, a franchiser who already has their operations, a training program, and processes set in place, becomes a far easier ‘idea’ to ‘sell’ to the bank.
There are a variety of organizations that can help a person identify a franchise they would like to be a part of. From The International Franchise Association (IFA), which is a group that provides an online directory of more than 1,200 opportunities; to FRANData, which maintains a database of franchise circulars, contact lists and other information – anything and everything can be found out about the legal and financial needs of the nation’s franchises.
Once all these parameters are set in place, there are a variety of things you can do in order to turn the ‘dream’ into a reality. It is normal to prepare yourself
to put down 15-20% of the cash you will need to begin from your own personal funds. When it comes to this particular ‘move,’ it is an absolute must to consider the tax implications if you consider taking a second mortgage or pulling from a retirement plan in order to get the money.
It is the commercial bank that most will head to first in order to fund their franchise, so your credit rating is literally one of the most important issues that will come up. A complete loan package that includes a personal financial statement, copies of tax returns for the last three years, and verification of the source for your down payment – will have to be provided. And keep in mind that bank loans – unsecured by collateral – are not only rare, they are a dime a dozen, even if your credit IS stellar.
Becoming a franchisee of a good, already established business, and being able to supply solid collateral, may still not be enough. In fact, most commercial bank loans to hopeful franchisees only happen when the borrower has a long-term relationship with the banker, or is a prominent figure in the community.
If the commercial bank avenue is a bust, or simply not the avenue you wish to pursue, the U.S. Small Business Administration (SBA) can also be a great help. SBA loans are partially guaranteed by the government which makes them far less risky. The standard SBA loan for franchisees is known as the “7(a),” and these loans of five- to six-year maturities can provide the short-term working capital that you need. When you think about real estate loans, which can run for over twenty years, SBA loans seem a far better arrangement in the long run. They range in size from $250,000 to $2 million. And most of that money is used for franchise fees, improvements to the building or working capital. The borrower still must contribute some equity, and they’re expected to repay the loan out of the franchise’s cash flow. The SBA will probably require your lender to take your home, your carsyou’re your family pets as collateral for the loan, but sometimes this is better than no loan at all.
Even though you may stumble across a franchiser who helps by offering internal financing by deferring a percentage of the initial franchisee fee – these are hard to find. And interest rates are likely to be higher than the commercial bank or SBA options. The one upside to this? Not having to put up collateral to open the franchise and get it up and running.
In the end, money is the biggest hurdle to leap when it comes to jumping into the franchise mix, so the safest thing to do – before making any move – is check with Mike Rosenthal to make sure that each and every ‘i’ is dotted and ‘t’ is crossed!
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