One of the best ways for young entrepreneurs to become new business owners is to join a franchise. This allows them to get up off the ground quickly with an established market, product and process without a steep learning curve.
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.
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How to build an investor-friendly franchise
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 a 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 a 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.
Investors vs. bank loans for franchises
Generally speaking, the biggest difference between an investor and a lender is that investors tend to loan money to startup businesses, whereas banks prefer to loan money to proven, existing businesses. Here are a few things investors and bank lenders evaluate before working with your business:
What investors look for in startups
- Your pitch. First and foremost, investors want to know what your big picture pitch is. Rather than diving right into your financials, investors want to understand your market analysis and how your product or services solve a problem. In other words, an investor wants to see a thorough plan to bring your idea to fruition.
- Your potential. Investors, more than anything, are looking for a significant return on their investments. Therefore, they want to invest in startups they believe have the potential to be the next big, publicly-traded company. One of the primary indicators of a startup’s potential is its ability to scale and grow as the market demand increases.
- Your equity offer. Finally, investors don’t charge interest on the money they invest in a company. Instead, they look for a share of the startup’s equity.
What banks look for in small businesses
- Your cash flow. Banks like to lend money to established businesses with steady, reliable income to minimize their risk. To assess this, banks and other lenders will evaluate your revenue streams, profit and loss statements, and credit history to make sure you have enough money left over after expenses to pay back the loan.
- Your collateral. Additionally, lenders often look for a secondary source to repay a loan if a business is unable to generate enough capital. Banks will consider real estate, vehicles, business equipment or other valuable assets to offset their risk.
- Your experience. Finally, banks and lenders want to know what your business is and if you have enough experience to ensure your venture is successful. They will also go over your business plan and financial projections to see how well you know the market and if your past projections have proven accurate.
Where to find investors
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:
- Online fundraising platforms. Over the past decade, online fundraising platforms have grown in popularity and many accredited individual investors use them to find promising companies. A few popular equity crowdfunding platforms include AngelList, SeedInvest, StartEngine and Wefunder.
- Social media. Social media platforms are a great channel to connect with your audience, establish your brand, and market your product or services, but it is also an excellent resource to find potential investors. LinkedIn, in particular, is a great place to cold pitch or make strong connections, but you can also use platforms such as Facebook and Twitter to foster relationships and have thoughtful conversations.
- Blogging. One of the best long-term strategies to develop an inbound audience is to start a blog that shares your story, states your goals and illustrates your progress. You can also track down potential investors and read their blogs for any insights into what they look for before investing in a young company.
Additional reporting by Sean Peek.