- December 12, 2021
- Posted by: Robert Brown
- Category: Investing
You have decided that your future involves buying into and running a franchised business. You have even decided on which franchise chain you want to buy into to.
Yet, you talk with the franchisor, your local banks as well as private franchise lenders only to find out that you cannot get the capital (money) you need to pull all of this off.
For the vast majority of franchises, you will have to find ways to fund the franchise purchase, the franchise build out including property and equipment as needed as well as initial and ongoing working capital to cover your daily costs for labor, marketing, inventory or supplies.
But, if you can’t get that needed capital via financing from traditional sources like banks, SBA loans, retirement funds, franchisor programs and private franchise lenders – where do you turn next – or, more simply put, 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 get traditional financing. In fact, those who cannot get conventional business loans to fund their franchise dreams are in the majority these days given the continued poor state of our small business loan and capital markets.
Second, and more important, none of this has to hold you back.
Running a business (including a franchise) is all about getting yourself and your business’s products and services out in the public – creating awareness in your company and education on what your products or services can offer potential customers.
Thus, your business’s success depends on your ability to sell that business – sell it and its products to customers – then deliver.
And, rising money to purchase or advance your franchise is no different. If you can’t sell your business concept and its potential to possible financiers – then how do you expect to be able to sell your business to possible customers?
Sell Your Concept – Local Investors
One of the great things about franchise businesses is that, at least the most well 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 then becomes, “where or who do you sell too?”
And, the answer is local investors – essentially anyone and everyone that will listen to you and your story.
There are many business and other professionals in each and every city across this nation that have found their own success and want to give back – give back by helping other business owners find their own success.
There are doctors, lawyers, accountants and other business professionals that love to invest in local businesses in their own communities. Now, these may or may not be accredited investors and it really does not matter. What matters is that they have money to spare and are willing to invest in your company.
Further, most of these individual investors are constantly looking for new places to invest – which make your sell job that much easier.
So, the idea is to get out there and sell to them. But, instead of selling the benefits of your potential products and services you have to sell the investment – what the investor can expect to get out of it.
This includes letting your prospective investors / partners know what is not only expected from them in terms of investment and ongoing financial support but the returns they can expect to receive for that support. Now, no investor will agree to fund your deal if they think they will lose money – no matter how much of a good feeling they do get from playing alone.
And, no investor will think that they double their money every 6 months for the life of the business.
But, they do expect to earn something for providing you their hard earned capital. So, let them know (honestly) what they can expect and see how many want to come aboard.
And, getting money to start and run your franchise is not the only benefit.
In fact, franchisors tend to like deep pocket investors, partners, co-managers or what ever you want to call them. Not only does it mean that the franchisor gets another franchisee (which benefits all within the system) but also that, should the business have a bad month of season (which all businesses have from time to time) that business can go back to the money well to get over that temporary downturn (making the franchisor’s decision to approve you that much easier).
Further, your franchise also get one or more additional mentors that can help you run that business – from people who have been there and gone through that before.
And, not only do these local investors get the chance to feel good by giving back, they also stand a chance of earning better returns on their money then simply putting it into low yield bonds, the stock market or pathetic money market accounts (this is a selling point by the way).
Here is one success story. As a young commercial lender, I had a gentleman come to me 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 in an IHOP restaurant washing dishes when he was in high school. He then worked himself up from dish washer to server to cook to shift manager to general manager and had been the general manager of his particular IHOP for over 7 years – 7 years in which that one restaurant saw some of its highest level of revenue growth in its long history.
However, Bobby also had bad personal credit (a killer item when seeking a business loan) as well as he did not have any 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 could not get a business loan – from any one.
So, we started discussing other options and ended up putting together a simply Private Place Memorandum (PPM) – required under Reg D with the SEC – and started targeting local professionals for investment.
Long story short – Bobby was able to land four (4) local doctors who not only funded the money he needed to build his new store but who also committed to continue to fund the restaurant if and when needed.
Again, long story short – Bobby got out and sold himself and his idea and ended up by-passing traditional financing to get the capital he needed. Today, Bobby owns and runs (with his partners) seven (7) franchise restaurants in total.
Finding 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 a current listing) as well as joining and attending local civil or social clubs. You could attend any and every event – public or private – that you can in your area. Or, you cold just simply go around knocking on doors.
The idea here is get yourself, your name and your business concept out there and circulating – this meaning talking to everyone that will listen and even to those that won’t.
The reason is that, more likely than not, the people you do talk too are not the ones that end up investing in you but are the ones that pass along your deal to those other investors who will.
Thus, you have to look for local gatekeepers – professionals like CPAs, lawyers and other business owners who 1) could invest or 2) more likely know the people that do invest. And, if a local investor heard about a deal from someone they know and trust, they are more inclined to actually listen to that particular deal.
So, if you think you can be successful in business and that its success will only come from your ability to sell that business, then get out there and start selling your business for investment. And, while no one likes to spend the time raising money (would prefer to actually work on growing the business), know that raising money is only a short-term event. Once it is done, it is done – unlike in your business where you have to sell it day-in and day-out.