Franchising is an attractive option for those who want to start a business of their own. It grants franchisors the opportunity to expand while decreasing their risk of debt because franchisees are required to open and operate their location. Franchisees get to join the ranks of an established brand, operate according to a successful system, receive support and assistance from franchisors, and in many cases see cash flow quickly after taking ownership.
Like anything else, there are certain things you should know when joining or starting a franchise.
Franchisors – Preparing A Business Plan
Yes, franchisors avoid paying the cost of opening additional locations when they gain franchisees. However, it is still up to you to create a solid business plan that takes into account details such as your flagship location, local competition, and market. After all, a business in proudly offbeat, progressive San Francisco, California will likely draw different clientele than the same business in traditional, glamorous Dallas, Texas.
Cash flow is an important reality to include in your plan. It is highly likely you will experience slow times, especially in the beginning. Surviving during periods when fewer customers purchase or walk through your doors boils down to borrowing and/or setting aside enough funds.
This will take meticulous calculations and self-discipline on your part. Sticking to your operating budget could make or break your business. Try to resist spending money excessively during the first year, even if you experience a windfall.
Franchisees – Showing Respect For The System
When you commit to joining a franchise, you agree that you will follow the policies and systems set forth by the franchisor. If you have a burning desire to be free of these rules, then starting a franchise is not the best option for you.
Wise franchisors are certainly receptive to hearing new ideas from enterprising franchisees – within reason and proposed in a respectful manner. This means resisting the urge to buck the system just because you feel like you could do a better job than the franchisor.
You should also make sure your idea aligns with the values and brand offer of the company. For example, going completely vegan would never even be entertained by fast food chains with hamburger and chicken dominated menus. It is off brand.
If you believe you could improve upon any part of the existing system – from operating procedures to products sold – approach the franchisor in a respectful way and be prepared to explain to them how your idea benefits the business. If you cannot come up with any reasons, it is probably a sign that your idea is not the right fit.
Franchisors – Choosing The Right Kind Of Financing
While in the long-term, opening a franchise is certainly a cost-effective way to create expansion opportunities compared to a business that is not franchised, realistically, you will still have to invest money in starting and operating your business. It is also essential to understand the difference between cash flow and profit. And once the business is established, you should reinvest in it progressively.
Working capital should be one of your top priorities when it comes to financing your franchise. A shortage of working capital could render you unable to pay your bills on time. In order to avoid this pitfall, you must have enough working capital to cover for those periods when there is less cash coming into the business.
Fortunately, there are a variety of loans you can choose from to fund your new venture. Commercial bank loans are, as the name implies, are issued by banks. The process is straightforward, if rigorous. The onus is on the bank to approve candidates who can repay the loan and for this reason, financial institutions subject applicants to a detailed analysis of their personal credit history. A banking lender will also require you to present your business plan for review.
SBA loans are partially backed by the United States Small Business Administration and are coveted because they tend to come with lower interest rates and longer repayment times. The primary drawbacks of SBA loans are the lengthy application process and stringent qualification standards.
Sometimes franchisors will improve their chances for expansion by offering financing options to franchisees that are tailor-made to the unique needs and characteristics of running that particular business. The terms of franchisor financing agreements are specific to the company, so it is critical to enlist the services of an attorney when drafting these documents to ensure they are beneficial to your existing business as well as your franchisees.
Securing financing through an alternative non-bank, non-SBA lender is a wise move to make for several reasons. These lenders have realistic expectations; they understand that a successful business owner may not necessarily meet all of the strict requirements imposed by other types of lenders. They realize that the faster you get your business up and running, the faster you can generate revenue. As a result, they do not subject you to a lengthy approval process. And since different types of businesses have different needs, alternative lenders offer a variety of loans for starting a franchise in a wide range of amounts – from $100,000 to over $2 million.
Franchisees – Choosing A Franchisee Model
Franchising models are broken down into two types: single unit and multi-unit. In the first scenario, the franchisee opens a single unit. Multi-unit franchisees, on the other hand, are franchisees who own and operate more than one unit, typically in the same general region.
The single unit model is what comes to mind when most people think of franchisees. In this model, franchisees usually open one location with no plans to expand in the immediate future. Their back-office operations are often simple, consisting of a personal computer and a home office. Single unit franchisees are usually first-time business owners. That said, many of these franchisees transition into multi-unit franchisees down the line.
People with significant business ownership experience are often drawn to the multi-unit model. In some cases, these franchisees are more established than the franchise itself. They make a decision to invest in it because they recognize a solid venture and want a buy-in early on. While a multi-unit model requires investing more money and time up front, it also offers the potential for more profitability in the long run.
Reasons Why Franchises Fail
While choosing to franchise mitigates some risks for both franchisors and franchisees, there are still major mistakes either could take that could cause the business to fail.
- A bad or underdeveloped business model
- A lack of training in both operational matters and the basics of running a business
- Ceasing of core functions that hold the network together if the franchisor goes broke
- Joining a franchise that is not a good fit for the franchisee from a business perspective
- Failing to formulate a solid business plan before starting their branch
- Opening their business without sufficient working capital and failing to reinvest in the
- Having unrealistic expectations about owning and operating their business
- Investing too much time and money in a different business venture
- Failing to evolve to keep up with the market in which they operate their business
Franchise Financing Made Better
The loan amounts we extend for starting a franchise help set you up for financial stability because they are based on the total project cost including working capital. Three to 10-year terms are available and fixed-term rates start at 7.5%. In most cases, we do not impose any prepayment penalties. And we can provide loans between $100,000-10,000,000 to qualified borrowers without putting up their personal collateral.
Thinking you may want to expand your business to a different state in the future? We have you covered with out-of-state borrowing.