Franchise Funding

Table of Contents

Are franchises affordable to fund?

Affordability is in the eye of the beholder! For many people a franchise is not an affordable investment because of the minimum investment amounts required. For others, a franchise investment will not only be affordable, but will allow them to diversity their portfolio. 

You will need to meet minimum requirements to become a franchisee, and each franchise will have different requirements. Anyone who is concerned about market changes, wants more control over their investments, seeks freedom from the corporate life, and wants to control their finances could find a franchise an affordable option.

To discover if a franchise is an affordable investment for you, you need to consider the total amount you are willing to invest in a franchise location and ask yourself if you can afford to lose that money. 

But a franchise is a safe investment, right? Not necessarily. A franchise, like any other business or investment, has risk involved. The difference between a franchise and a regular business is the support you receive from the franchisor. And they differs from a stock market investment because you have direct control over the return.

Why are franchises considered an investment?

In recent years, the U.S. economy has been massively advantageous to borrowers. Rarely has it been cheaper to borrow money to buy a house or a car or to start a business. But what if you don’t want to borrow—what if you want to invest? The borrower’s advantage is often the investor’s hardship. Where are the options for a 10-15 percent—or higher—return? 

Franchising is a fantastic option for investing because even if you borrow money to finance a location, you have the opportunity to earn a return higher than the initial invested amount. It has been a franchise economy lately. Franchising is truly an investment, like any other, because there is risk. 

  • Franchising has double the autonomy. If you’ve ever wanted to feel in control of your destiny, consider that franchising offers both career independence and investment autonomy. Rather than entrusting your life’s savings to the skills and reliability of a fund manager, you can invest your assets in a venture that you control.
  • Choosing to invest in a hands-on franchising option lets you double down on your independence. You direct your money to a concept you believe in, and take control of that operation, too. If you’ve ever felt like you’re at the mercy of your career rather than being the architect of it, this double dose of self- sufficiency may matter a great deal to you.
  • Franchising provides unprecedented insight.  Stock investments rely on faith and history; few among them that can be predicted based on either. However, due to the information provided in the standard Franchise Disclosure Document, the franchise selection process allows you to discover the financial outlook of your choice. Additionally, the FDD offers the thoughts and comments of investors like you who’ve already made their investment. You have the opportunity to connect with them to ask pointed questions to guide your decision.
  • What other investment option offer an up-close-and-personal assessment of how prior investors are doing and how they feel about the choices they’ve made? To get a bigger picture and give context to your direct interaction with franchisees, you can also review large scale franchisee satisfaction surveys. These tools provide exceptional insight into the inner workings of franchised corporations.
  • Franchises provide multiple returns on investment. One of the biggest advantages franchising offers the investor is the possibility of capital growth in numerous ways. For example, in the first stage of investment, a typical franchisee draws a salary. At the second stage of investment, once the business hits the breakeven point, the franchisee shares in the annual profits of his or her venture.
  • An experienced franchisee will discover the franchise unit becomes a sellable asset. The wise investor chooses a concept based on a reasonable prediction that the value of the business itself will increase over time. Investors who opt to invest as area developers or master franchisees can create even more streams of income through multiple units or by way of their umbrella of franchisees.
Quick Download Franchise Funding Checklist

How much money does it cost to fund a franchise location?

There is no single answer to this question. All franchises will have different requirements for funding levels. Once you decide on a concept, they can provide more detailed information. Most franchisors have a franchise page that will outline their estimates, which are also found in an FDD. It is important to note that funding levels are best guesses. They are developed using historical data and previous experience, it may not reflect your experience. 

Most franchise funders will also tell you to not bet on the low end estimates. Expect to invest at the higher level and come in under, rather than run out of liquid capital before you open your doors. 

Service franchises will start around an investment level of $75,000. Facility-based franchises will have around a $200,000 minimum investment. All of these estimates can change when the territory, number of units, build out requirements, and equipment needs are considered.

What are net worth requirements for franchises? How do I discover my net worth?

Every franchise has its own set of requirements that a franchise candidate must meet and one requirement will be a minimum personal net worth. Before you commit to any franchise concept, you’ll need to know your documentable net worth. Every franchisor and lender will have a measure of net worth they want you to meet as assurance you are solvent enough to launch a business successfully. 

To calculate your net worth, start with a summary of your assets, then subtract your liabilities. Don’t forget to include investment and retirement accounts, annuities, and any loans in your name. 

Net Worth = Assets - Liabilities

If you have a low or negative net worth number, you probably need to wait. Take some time and beef up the asset side of your balance sheet (or reduce the debt side) before moving forward with franchise investment.

In general you can expect to need a minimum of $100,000 of net worth to become a franchisee. This is not a hard and fast rule, just a general idea for your expectations. Every franchise will have different requirements.

 

Hear About All Your Funding Options

How much liquid capital is required to become a franchisee?

Liquid capital is the money you could produce in cash or easily convert to cash. Your liquid capital includes funds in savings accounts and accessible stock investments. If your net worth is within the recommended range your franchise consultant or your preferred franchise suggests, your next step is assessing your liquid capital.

There are no hard rules for liquid capital requirements. You can expect to need a minimum of $50,000 to $100,000 of liquid capital for a service-based franchise concept. A facility-based franchise has a higher minimum of around $75,000 to $100,000. Depending on the size of the commitment you make, you might need substantially more money at the table. A multiple territory development or an extensive and costly facility will have a higher liquid capital demand.

Keep in mind that these numbers only represent your liquid investment—not your total stake. Your total investment will include the liquid assets along with any financing you secure. Your total available liquid capital may not all be sitting in a savings account. You may also have convertible assets that can add to your total.

Podcast Episode: Don't Make These Franchise Funding Mistakes

Will my credit history be under scrutiny when funding a franchise?

Your credit history is a less tangible but vital part of your financial self-assessment. If you’ve made a habit of keeping your financial house in order, you’ll be rewarded when franchisors start looking at your suitability for their brand. 

Franchisors may consider your credit rating, proven financial stability, tenure as an employee in various positions, and payment histories when they weigh the risks of granting you a franchise. As part of your due diligence, order a copy of your credit report or use one of the many credit reporting apps available, and look for any inconsistencies or concerns. You’ll need to be prepared to explain any issues you find.

What are personal resources I can use to fund a franchise?

With your business plan in hand, it’s time to tap all your available resources to find the best possible financing at the lowest cost to you. As you enter this phase of capitalization, keep in mind that there are lenders, accountants and attorneys who specialize in franchise financing. In some cases, they represent your best chance of a smooth, successful financing experience. We recommend starting your financing investigations by weighing your ability and willingness to leverage your assets and working your way from there to conventional and other potential lending sources. 

Home Equity

Homeowners may be able to leverage your home equity through a home equity line of credit (HELOC) or a home equity loan (HEL). The most significant advantage of this is that leveraging your existing equity should be possible at a relatively low interest rate. The disadvantage is the inherent risk involved in putting your home up as collateral for your business. Always take care not to assume more risk than you could handle.

Retirement Funds 

You can leverage retirement funds for your business investment and avoid penalties. Specialized companies can help investors take advantage of the Entrepreneur Rollover Stock Ownership Plan (ERSOP) or Rollovers as Business Startups plan (ROBS) to fund new businesses. 

In these scenarios, your retirement funds become an investor in your business instead of being invested in publicly traded equities or fixed-income investments. Using this kind of account is quite complicated. Make sure you work with a reputable investment professional to ensure your ERSOP or ROBS is set up and executed correctly. Some of the biggest mistakes franchise candidates make are at this stage. Your local bank may offer the service, but going with a company that has experience will help you. 

As with the use of home equity funds, use caution as you look at utilizing retirement dollars. Know the risks of putting this money earmarked for long-term security on the line for a business venture. Franchises, as with all investments, have risks and can fail.

Family and Friends

Gifts, loans, and investments from family members can be a great source of capital for your business. Some candidates will approach their close family members in hopes that everyone will reap the benefits of a successful franchise location. If you do accept funds from people you have personal relationships with, make sure you have an agreement in writing. Include the terms and conditions of the gift, investment, or loan clearly outlined— including investment terms, payback terms, interest, and what happens if you default. Having the details hammered out in an agreement may prevent a misunderstanding down the line.

Most franchisees get SBA loans. Working with a knowledgeable company is important and you can watch why in this video

go anywhere for an sba loan?

What external resources are available for franchise funding?

Franchisor (or franchisor-assisted) financing

Franchisor financing is sometimes offered directly from a franchisor and sometimes provided through a third party prearranged by the franchisor. Programs vary widely, but some of these arrangements have notable benefits.

 For example, some may not require collateral; others might offer equipment leasing; some offer deferred payments. Many have low-interest rates, but others may not even be competitive with traditional loans. Check with your franchisor to see what programs it may offer, then be sure to compare all the choices available to you.

Franchise Financing Companies

Some companies specialize in financing franchise businesses and can offer assistance with figuring out how to capitalize yours. These companies understand the franchise business model and have relationships with financial institutions that fund franchise loans. 

Some also specialize in assisting clients with utilizing retirement funds as ROBS (Rollovers as Business Startups plans) and in securing U.S. Small Business Administration loans. In many cases, these companies have pre-approved dollars set aside to help people invest in franchised businesses. This can streamline the process of getting your investment dollars.

Traditional Loans

Another alternative is to leverage conventional business loans or commercial loans. There are many types of commercial lending, including secured and unsecured loans, short- and long-term loans, equipment loans, and business lines of credit. 

Expect to put up at least 20% of your investment to be considered for these kinds of loans. Be aware that many traditional lenders may not understand the franchise business model, unlike lenders who specialize in this area. As with any financing source, it’s always in your best interest to shop around, so make sure you check out business loans at multiple financial institutions. 

U.S. Small Business Administration Loans

The SBA offers loans through participating banks and lenders. Since the SBA will guarantee up to 85% of the loan, there is less risk for the lender—which can translate to a lower interest rate for you. SBA financing is not a government loan, but rather a private loan backed by government funds. There are multiple types of SBA loans you can investigate. 

Make sure you carefully evaluate the pros and cons associated with taking out an SBA versus a traditional loan. This can include loan establishment cost, the length of the loan, and the interest rates of the loan. Note that if your franchise company is listed on the SBA registry, it may help expedite the process for a new franchisee to get an SBA loan. Also worth noting is the fact that individuals with high net worth may not qualify for this type of loan.

Should I get a partner to help with the funding of a franchise?

This is a personal decision that every franchisee should make for themselves. We have seen some great partnerships. We have also seen some terrible ones. A partner may provide an influx of capital, but you should consider that person owns a portion of the business. You will need to work together every day for success. 

Partners that don’t outline specific duties and areas of responsibility are more likely to fail. When considering a partner, make sure you have serious discussions before agreeing to work together. If the partnership fails, the business will suffer. A suffering business becomes a very risky investment.

Podcast Episode: Franchise Funding During Coronavirus

Where can I find help to fund a franchise?

You first step should be scheduling a free consultation with a HIRE YOURSELF consultant. They can help you navigate the process of matching to the best franchise for you, guiding you through your investigation process, being introduced to a franchisor, and given suggestions for funding experts to help you.

HIRE YOURSELF has great relationships with the best franchise funding experts currently in business. We are more than happy to connect you with our trusted partners. You can hear from some of them on the HIRE YOURSELF podcast.

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