You have decided that your future involves purchasing and running a franchise business. You have even decided which franchise chain you want to buy from.
However, you talk to the franchisor, your local banks, and private franchise lenders only to find that you can’t get the capital (money) you need to accomplish all of this.
For the vast majority of franchises, you will have to find ways to finance the purchase of the franchise, the building of the franchise, including property and equipment as needed, as well as the initial and ongoing working capital to cover your day-to-day costs. of labor, marketing, inventory or supplies. .
But if you can’t get the capital you need through financing from traditional sources like banks, SBA loans, retirement funds, franchisor programs, and private franchise lenders, where should you turn? Or, in simpler words, is there another place to turn? too?
Financing Your Franchise When All Else Fails
First things first: know that you are not alone in your inability to obtain traditional financing. In fact, those unable to obtain conventional business loans to finance their franchise dreams are in the majority these days due to the continuing poor state of our small business loan and capital markets.
Second, and more importantly, none of this has to stop you.
Running a business (including a franchise) is about getting yourself and your business products and services out to the public, creating awareness in your company and education about what your products or services can offer potential customers.
Therefore, the success of your business depends on your ability to sell that business, sell it and its products to customers, and then deliver it.
And raising money to buy or advance your franchise is no different. If you can’t sell your business concept and potential to potential funders, how do you expect to be able to sell your business to potential clients?
Sell your concept: local investors
One of the best things about franchise companies is that, at least the best known ones, they sell themselves, up to a point.
So with your ability to sell and your franchise’s ability to sell itself, the question is, “where or to whom do you sell too?”
And the answer is local investors, essentially each and every one of those who will listen to you and your story.
This is why:
There are many businesses and other professionals in each and every city in this nation who have found their own success and want to give back by helping other business owners find their own success.
There are doctors, lawyers, accountants, and other business professionals who love to invest in local businesses in their own communities. Now these may or may not be accredited investors and it really doesn’t matter. What matters is that they have money to spare and are willing to invest in your business.
Also, most of these individual investors are constantly looking for new places to invest, which makes their job of selling that much easier.
So the idea is to go out and sell them. But, instead of selling the benefits of your potential products and services, you have to sell the investment, which the investor can expect to get out of it.
This includes informing your potential investors / partners what is not only expected of them in terms of investment and ongoing financial support, but also the benefits they can expect to receive from that support. Now, no investor will agree to fund their deal if they think they will lose money, no matter how good it feels to play alone.
And no investor will think that they will double their money every 6 months during the life of the business.
But they do hope to earn something by providing you with their hard-earned capital. So let them know (honestly) what to expect and see how many want to get on board.
And getting money to start and run your franchise isn’t the only benefit.
In fact, franchisors tend to like pocket investors, partners, co-managers, or whatever you want to call them. Not only does it mean that the franchisor gets another franchisee (which benefits everyone within the system) but also that if the business has a bad seasonal month (which all businesses have from time to time) that business can return to the money. Well, to get through that temporary recession (which makes the franchisor’s decision to approve it that much easier).
Plus, your franchise also gets one or more additional mentors who can help you run that business, from people who have been there and been through it before.
And, these local investors not only have the opportunity to feel good about giving back, they also have the ability to get better returns on their money and then simply put it into underperforming bonds, the stock market, or pathetic money market accounts. (this is a point of sale by the way).
Here is a success story. As a young commercial lender, I was approached by a gentleman to apply for a $ 350,000 franchise loan, a loan for a new IHOP restaurant. This person (Bobby), at age 40, had all the credentials. He started working at an IHOP restaurant washing dishes when he was in high school. He then went from dishwasher to server, cook, shift manager, and general manager, and had been the general manager of his particular IHOP for over 7 years, 7 years in which that restaurant experienced some of the highest levels of revenue growth in its long history.
However, Bobby also had bad personal credit (a critical element when looking for a business loan) and had no money for a down payment (required for a loan).
But, he had done his research and found a perfect location for a new IHOP and got that location cleared through the franchisor.
However, Bobby was unable to obtain a business loan, from anyone.
So, we started discussing other options and ended up drafting a Private Place Memorandum (PPM), required under Reg D with the SEC, and started targeting local professionals for investment.
Bottom line: Bobby was able to hire four (4) local doctors who not only financed the money he needed to build his new store, but also committed to continuing to finance the restaurant when needed.
Again, in a nutshell: Bobby went out and sold himself and his idea and ended up bypassing traditional financing to get the capital he needed. Today, Bobby owns and operates (with his partners) seven (7) franchised restaurants in total.
Find local investors
The best (and only real) way to find local investors is to network, network, and network.
This could mean finding and attending local civil and professional events in and around your area (your chamber of commerce should have an up-to-date list), as well as joining and attending local civic or social clubs. You can attend any and all events, public or private, that you can in your area. Or, you’re just cold and you’re just knocking on doors.
The idea here is to make yourself, your name, and your business concept out there and circulate, this means talking to everyone who will listen and even those who won’t.
The reason is that, most likely, the people you talk to are not the ones who end up investing in you, but rather the ones who pass on your treatment to the other investors who will.
So you should look for local gatekeepers – professionals like CPAs, lawyers, and other business owners who 1) might invest or 2) are more likely to know the people who invest. And, if a local investor learned about a deal from someone they know and trust, they will be more inclined to listen to that particular deal.
So if you believe that you can be successful in business and that your success will only come from your ability to sell that business, then go out and start selling your business for investment. And, while no one likes to spend time raising money (I’d really rather work on growing the business), know that raising money is just a short-term event. Once it’s done, it’s done, unlike in your business where you have to sell it day after day.