Franchising with Financial Partners

Previously, we discussed franchising without any financial partners. Today we look at ways for entrepreneurs without their own capital resources to get into the game.

Lack of available capital has plagued small-businesses for the past couple of years, forcing entrepreneurs, especially start-ups, to seek alternative sources of funding. Nationwide for 2010, the International Franchise Association predicts a lending gap of $3.4 billion for franchised businesses seeking to start up or expand existing operations.

Only a few short years ago, aspiring franchisees could use their savings, retirement plans, home equity, or any of several over-friendly banks and lending institutions to finance their dreams. But the Great Recession of the past 2 to 3 years has put the squeeze on those assets, causing many to look beyond their own means in search of financial partners.

Many kinds of potential financial partners are available to choose from—and all come with a price. Ideally, a silent partner, content to invest in you and your franchise and "leave the driving to you" would be the perfect find. While this does happen, don’t hold your breath.

And no matter what type of partner you take on – silent, family, friends, private equity, "angel investor" – you first must decide how much control, if any, you are willing to give up. (For some, it might be a matter of personal style; some people work better on their own, no matter how hard they may try to do otherwise.)

Depending on the type of partner you take on, it’s always best to "hope for the best and plan for the worst." One of the most typical pitfalls in entering a partnership is not taking care of the second part of that aphorism. Experts on partnerships always advise parties to sign a "pre-nup," i.e., a partnership agreement that clearly spells out – in writing – an exit strategy in case things don’t work out as planned (or hoped for).

"The worst" can include struggles for control, strategy, or direction; an unclear division of responsibilities leading to conflicts; pressures from family and friends; one partner discovering that what seemed like a great idea at the time wasn’t what they thought it would be; unexpected external events or business conditions that delay profitability, or worse, result in red ink; and human factors such as marriages, relocations, an unexpected medical condition, even an untimely death. Well, you get the idea… what can go wrong, actually may.

If you don’t have the capital or the ability to borrow the money you need for the franchise fee and all the costs associated with starting up – and keeping the business afloat until it begins to turn a profit (which can take from 6 months to 3 years) – a partner may be just what the doctor ordered… even with all the tradeoffs that brings.

After all, if you’re longing to be your own boss in a field of your own choosing, it’s better to get into the business you love, partner (or partners) and all, rather than chafe away for years at a job you hate, wondering "What if?" There’s an old saying in franchising: "Making it on your own doesn’t mean making it by yourself."

Finally, the entrepreneur’s passionate desire for financial independence can overcome the drawbacks of giving up some level of autonomy, at least at the outset. Besides, you can always buy out your partner later – but be sure to put it in writing!

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