I only have my 401k and a few stocks for assets. How can I raise additional funds to purchase a franchise?
I want to purchase a women's clothing franchise where there is currently a teen store and children's store. The women's clothing store is much needed in the area based on research from the corporate offices. I do not have many assets other than my 401K and a few stocks. What would you advise I do to raise the funds for such a venture?
I run into this a lot.
For example, I've had clients who want to buy a franchise come to me with a good net worth, say $650,000, but $500,000 of it is tied up in retirement accounts.
While it's good to have a healthy retirement account, if you don't have other assets that are liquid (that you're comfortable using), you're only left with a couple of choices.
1. You can partner with someone who has more liquid capital than you
2. You can use a portion of your retirement funds to start your franchise business
Now, both examples have pros and cons.
For instance, if you partner with someone, you'll have to generate a lot more revenue, because you're trying to bring in income for two parties. In addition, you'll need to hire an attorney to draft a formal partnership agreement that defines the responsibilities of both parties, along with the necessary financial arrangements that spells out how much each partner gets.
In the case of using a portion of your retirement account to fund your business, there are ways to do it without penalty. One way is called ROBS, which stands for Rollovers as Business Startups. It's a highly-specialized way to set up a company only using retirement funds.
I hope that helps!
The Franchise King®
Have you considered simply getting financing rather than trying to fundraise? A business acquisition loan is financing that's specifically designed for purchasing a franchise or existing business. Unlike some pricier business financing options, you can get an interest rate as low as about 5% if you have good credit. Terms are typically 10-25 years and loan amounts range between $5,000-5,000,000.
If you do opt for a business acquisition loan, you'll need copies of the franchise's financial projections and valuation. Also, walking into the bank isn't the fastest route. I recommend using an online marketplace like Lendio so you can compare all your loan options and choose the best deal without having to go from bank to bank and speak with brokers.