Raising Entrepreneurial Capital

2% goes for local marketing, either individually or in concert with other area

franchisees.

One person who’s hoping to become a Torrefazione franchisee—and who

probably has a pretty good notion of the chain’s per-store sales volume—is

Barnette herself. A former U. S. West employee, she originally joined AFC after

visiting a Torrefazione cafe

´

, and served a stint in franchising for AFC’s Popeye’s

Chicken & Biscuits brand in Atlanta before being sent back out to Seattle.

‘‘Now I have the pleasure of sharing my dream with other prospective part-

ners,’’ she said.

FINANCING THE FRANCHISE

Raising the capital for the initial investment in a franchise is not unlike

the earliest stage financing discussed in Chapter 2. Most franchisers want

you to have at least some of your own cash to cover part of the initial start-

up costs, often 20% to 50% of the franchise fee. The reason for this is sound.

Cash flow is likely to be tight in the first year or two of a new franchise, and

debt service payments might be enough to push the fragile franchise into

unprofitability or worse.

Before approaching anyone for financing, you will need to have a com-

plete, well-tho ught-out business plan. Also, as with a new business start-up,

banks are unlikely to be interested in conventional loans to finance the

franchise investment. Considerable personal collateral would have to be

pledged to get any loan, and a line of credit is the most likely loan to get

from a commercial bank. Given that many of the initial needs of the

franchise are long-term, a line of credit may not be the preferred loan type

for the entrepreneur.

Money from family and friends is a possibility, but beware of structuring

the investment as a partnership. Franchisers are entering an agreement with

you, not a partnership, and would not look favorably on equity provided by

a partnership as the initial invest ment.

8

The best source of initial investment is your own savings. After exhaust-

ing your savings, you can resort to the usual bootstrapping techniques of a

second mortgage, credit card debt, or borrowing against your stocks and

bonds or retirement plan, but all of these are sources of personal debt that

may add to your cash flow troubl es. Angel investors might be interested, but

again, the warning about legal structure pertains.

8

While the franchiser may not want a partnership financing the franchise, make sure you can

organize the business as an LLC or a corporation to protect your personal liability and separate

your personal assets from the business.

302 Franchising

FRANCHISERS

All franchisees should investigate the role of the franchiser in initial

financing. Many franchisers provide financial help in some way. Often it is

through an established relationship with a lender. The franchiser introdu ces

you to the lender and supports you in the loan application process.

If the lender has loaned money to other franchisees in the system, they

will be familiar with the business model and the cash flow needs of the

franchise at start-up. This reduces the lender’s learning curve and improves

the probability of obtaining financing.

Some franchisers provide financing themselves, and some obtain finan-

cing on behalf of the franchisee. At a minimum, the franchiser may be

willing to guarantee your loan with a bank or non-bank lender. Some

franchisers buy the land, building, and equipment and lease it to the fran-

chisee as a way of financing the start-up operation.

NON-BANK LENDERS

There are lenders other than commercial banks that might be willing to

provide start-up financing for franchisees. These non-bank lenders can

provide equipment financing through lease arrangements. Some will even

structure the initial franchise fee into a lease, providing cash for the fee and a

repayment mechanism. Non-bank lenders also provide conventional loans,

using the assets of the franchise as collateral, and will provide 100% finan-

cing in some cases. A simple ‘‘franchise financing’’ que ry on the Internet will

turn up a wide variety of franchise lenders and financial matchmakers.

THE SBA

The U.S. Small Business Administration (SBA) has been guaranteeing

loans for franchisees since 1993—a total of 12,000 loans to date. Recently it

has streamlined its system to improve efficiency by creating the Franchise

Registry program.

In this program, franchisers register with the SBA Franchise Registry.

Registration is optional and does not convey approval by the SBA or

indicate anything about franchiser quality. Registration is merely a mechan-

ism to expedite financing. The franchiser’s application is approved once, in

a central location, and no additional approval is needed as long as the

franchiser does not change the terms of the franchising agreement. In keeping

with its mission, the SBA will verify that the franchisee is indeed a small

business.

Franchising 303