For many entrepreneurs, a franchise is one of the best ways to become a business owner without the steep learning curve of building a new business from the ground up.
Franchisees usually benefit from a ready-made, tried-and-tested business model from the franchisor, which often includes a known brand, marketing strategy, and benefits associated with economies of scale when buying supplies and other relevant business inputs.
That package of goodies, however, doesn't come without a price tag – sometimes a hefty one, depending on the franchise brand you want to associate with. In addition to a franchise fee, which typically ranges from $20,000 to $50,000, franchisees often have to meet contractor and professional fees, as well as costs associated with signage and inventory. As with any other business, they also have to raise sufficient working capital to launch the business and keep it running until it breaks even.
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 that might have more favorable lending terms.
Editor's note: Looking for financing for your business? Fill out the below questionnaire to have our vendor partners contact you with free information.
Here are a few tips to help you build an investor-friendly franchise business.
1. Cover all your legal bases.
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 serious implications for franchise businesses.
Liability issues can weigh heavily on any business, making potential investors shy away from partnership. This report, for instance, found that businesses often lose millions of dollars in product liability settlements, sometimes with bizarre figures like $3.5 million in settlements being reported. This happens even when the business in the suit was not involved in the development of 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 (LLC, C-corp, etc.), which in itself is a critical step that determines taxation regimes and legal rights associated with your business.
2. Create a solid business and marketing plan.
One common misconception among entrepreneurs venturing into the 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, no investor will come on board if you don't have your own business plan, detailing the strategic vision and goals for your franchise business, financial projections, and a comprehensive background of the business.
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 that 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 greatly influence how they assess the profitability of your venture.
To that end, invest in every practical marketing tool that a typical business will use 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% 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 trademark and branding issues later on.
3. Streamline your franchisee's finances.
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 quite common for single franchisee units to employ basic accounting systems around the office, franchisees with multiple business units might have a difficult time managing finances via simple financial software, a situation that often makes the business look bad in the eyes of potential investors.
To remedy this problem, put in place a robust accounting system that links up with all your business units, ensuring again 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. [Wondering which accounting software is right for your business? Check out our reviews and best picks.]
Additionally, be extremely selective with the bank that 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.