Going Into Franchising with No Financial Partners
Going into business for yourself can be a risky and yet ultimately rewarding experience. As with any new business, a franchise unit is going to require upfront capital. And in most cases it takes a significant amount of financing to get started. For those individuals who choose to join the franchising world, there are two distinct ways to finance entry into the business - on your own or with partners. In this section we will take a look at the strategy of getting into franchising on your own and without a financial partner.
First, let's consider the cold, hard facts of the financial side of franchising.
When you buy into a franchise system there are a number of upfront costs. And of course you will need to be prepared to cover these costs - and other ongoing costs down the road. Beyond the startup costs, you will need to foot annual franchise fees and/or regular royalty fees. Some franchisors require other regular fees that help subsidize the costs of marketing, advertising, and other ongoing support. Then you have daily operational costs such as supplies and payroll to meet. Remember, it could be months or more before your business is generating any profit. You will need some kind of financial reserve to cover your costs in the beginning.
A financial partner may be a good strategy for some entrepreneurs. Primarily, those who are cash-strapped or simply lack access to the kind of startup capital required. And in many cases, a financial partner can be a good resource, but the strategy does come with some potential drawbacks. For example, a financial partner is going to have skin in the game, and to some degree, is going to share power and control with you and could influence the way you run your franchise business. You'll also need to consider any interest expenses or other financial "fees" that you will be indebted for with a financial partner. Furthermore, you'll need to consider the consequences and potential liabilities if your financial partner decides he wants out, or worse, begins to have his own financial struggles. And finally, you'll need to weigh the stress that a financial partnership may put on an existing friendship or family relation. It's for reasons such as these that many choose to enter into the franchise world as individuals who handle the financing equation for themselves.
Here's how that typically happens.
You may be interested in purchasing a franchise because you have a large financial nest egg. Maybe it's a 401K from an old job, some cashed-in stock, perhaps an inheritance of some kind, the sale of a home. Maybe it's an SBA or conventional loan that you can qualify for. The point is, you can get the capital and you don't need a partner to do it.
If you can get the kind of capital you need to get the franchise off the ground, the payoff could be significant. Remember, many of today's most successful businesses, large and small, were started by individuals who had the drive, determination - and the capital they needed - to succeed. By financing your own franchise operation, you can retain more of the control, the direction, and ultimately, the payoff.
16.4: How To Work With An Operating Partner
17.2: Franchising with Financial Partners