2% goes for local marketing, either individually or in concert with other area
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.
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.
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.
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
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.
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 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
Franchising 303

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