Ways to Fund your Franchise – But The Franchisor isn’t one of Them!
Franchisors are being regularly approached by potential franchisees who lack any capital of their own with which to acquire the franchise. That’s simply wasting everybody’s time: if franchisors were prepared to fund each franchise they would rather have fully-owned branches than franchised stores.
The very concept of franchising is to grow a successful business model faster than would otherwise be possible – by leveraging franchisee’s capital. While each franchise has its individual requirements, it is common that a franchisee contributes at least 50% cash. Remember, one of the most fundamental factors which underscores success in a franchise is known as ‘skin in the game’ whereby the success or failure of your business is of potentially life-changing importance to you.
How, then, do most franchisees stump up that cash? Even before looking at the cash aspect, it requires a great deal of research and effort. That’s one reason irritated franchisors will be quick to show you the door when you announce you have no cash. How successful a franchisee would you be if you haven’t so much as invested the time to understand that you require your own funding?
There are also several ways of finding finance
Most potential franchise owners do not personally have the ready capital required to launch and run a successful franchise, and there are a number of options:
- Pension fund payout or retrenchment cheque is an important source of capital.
- Family and friends can be a source of funding, though be aware this can test and even destroy relationships if the undertaking does not succeed as planned. It’s not for nothing that one of the most commonly heard maxims is ‘don’t do business with family’. While franchises have a much higher success rate than other enterprises there is no guarantee, especially where there is no ‘skin in the game’. To get your skin in the game, any such loan should be well structured with terms of repayment (dates, rate of interest) and consequences for non-payment. Even wealthy relations, who may not specifically need the money, will become resentful if they feel they’ve been taken advantage of. Therefore, put the agreement in writing.
- Find a business partner to take a stake in the franchise. This also has its issues and goes well beyond just an additional source of capital. A partner would have to share your passion, determination and values in order to make the business a success. Even more than funding from family, this agreement would have to be reduced to writing, preferably by a lawyer detailing shares, profit sharing, duties and dissolution.
- Funding the franchise through debt equity or a business loan is often the best option, but even here the bank – more than any other party – will expect you to have skin in the game and will be highly unlikely to supply 100% of the funding required. The more money you have personally committed to your venture, the more likely it is that you will get a loan. Banks are only comfortable to grant loans to people who are committed to their businesses. A bank will also look at what security you can provide them in the form of assets, or a surety from someone who agrees to pay debt on your behalf should the franchise not succeed.
If you cannot provide any of these – remember to do your homework before approaching a franchisor – your initial meeting with the franchisor is guaranteed to be short.