Franchises offer entrepreneurs a proven business model, product or service and marketing strategy. However, they also come with a price tag ― sometimes a hefty one. In addition to a franchise fee, which typically ranges from $25,000 to $50,000, franchisees often have to pony up contractor and professional fees as well as costs associated with signage and inventory. As with any other business, they must also raise sufficient working capital to pay to get launched and running.
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As a result, franchisees must always be on the lookout for funding opportunities to help with some of these costs. Because of the highly competitive nature of business funding, it pays to build a business that will not only get loan approvals from banks and other traditional lenders but also attract independent investors, including private equity firms with more favorable lending terms.
Here are a few tips to help you build an investor-friendly franchise business.
When you’re looking to bring investors into your franchise business, remember that you’ll be adding another independent party, the investor, into an already complex web of interactions. To ensure things run smoothly, it’s crucial to take up the services of a franchise attorney from the get-go, who will help with things like the franchise agreement, the franchise disclosure document and issues of liability that often carry severe implications for franchise businesses.
Liability issues can weigh heavily on any business, making potential investors shy away from a partnership. Some companies have lost millions of dollars in product liability settlements. This happens even when the business in the suit did not develop the product in question. For franchisees with several units, such liability issues can create a loss-making, highly flammable business environment that potential investors won’t want to touch.
In addition to addressing any liability issues and helping with the necessary franchising documentation, a franchise attorney can be helpful when it comes to selecting a business entity, such as a limited liability company or C corporation, which in itself is a critical step that determines taxation regimes and legal rights associated with your business.
One common misconception among entrepreneurs venturing into a franchise business is that their role as franchisees will be limited to cashing checks and lounging behind an executive office desk. While the franchisor will often require the franchisee to stick by the original business model, an investor will only come on board if you have a business plan detailing your franchise business’s strategic vision and goals, financial projections and comprehensive business background.
Plus, despite the fact the franchisor will also have a marketing strategy in place ― usually complete with logos, banner designs and ad campaigns ― it is vital you develop and integrate your own marketing strategy with the franchisor’s marketing plan. Potential investors will often need to see how your establishment plans to interact with potential customers, something that will significantly influence how they assess the profitability of your venture.
To that end, invest in every practical marketing tool a typical business uses to find and close leads. Marketing strategies, such as email and social media marketing, can be quite effective for franchisee operators just starting out, thanks to the 58 percent of potential leads who check their emails every morning. To add to this pool of potential leads, you can use localized ad campaigns and promotion programs that target customers around your area of operation, ensuring your franchisor approves each element of your marketing strategy to avoid branding and trademark issues later on.
One of the biggest turnoffs for investors is a franchisee ― or any business, for that matter ― whose finances don’t make sense, even when the franchisor is a well-known, profit-making brand. While it is standard for single franchisee units to employ basic accounting systems around the office, franchisees with multiple business units might have difficulty managing finances via simple financial software. This situation often makes the business look bad in the eyes of potential investors.
To remedy this problem, utilize a top accounting system that links up with all your business units, ensuring that any new software or hardware you introduce meets the standards set by the franchisor, if any. Your system should be able to produce comprehensive financial and accounting reports at a moment’s notice in any of the locations under your franchise business.
Additionally, be highly selective with the bank you partner with, making sure it understands your business as a franchisee and your intentions to bring an investor on board. A good bank will grow with you by dishing out financial advice and support without interfering in the relationship between your franchisee and your investors.
Generally speaking, the most significant difference between an investor and a lender is that investors tend to lend money to startup businesses, whereas banks prefer to lend money to proven, existing businesses. Here are a few things investors and bank lenders evaluate before working with your business:
Investors often look for startup features like a product pitch, return on investment potential and equity offer:
Banks tend to look for proof of concept features like reliable cash flow, collateral and business experience:
Today, finding investors is relatively easy. The trick is making your startup or small business attractive to investors. Here are a few places where you can find investors for your business:
Additional reporting by Skye Schooley and Sean Peek.