How Growing Franchisors Get Access to Capital
The process of turning a successful business into a franchise takes a lot of time and money. If you are interested in taking your business to the next level but lack the needed capital, it is necessary to consider your business needs first.
Because small businesses are extremely helpful to the economy, there are many opportunities available to companies who need help raising capital. You can find financing that meets your needs by figuring out your startup costs.
However, before you even begin to consider franchising your business and getting the necessary capital, have a consulting professional conduct a Franchise Feasibility Study first. This study will help determine if your business and you are right for franchising. A quality Franchise Feasibility Study will cost you in the $5,000-7,000 range but will be well worth the investment if it helps keep you from making the wrong decision and spending hundreds of thousands of dollars in the process.
Winmark Franchise Partners has a high-quality product that you can rely on, and because we are a franchisor ourselves and are not reliant on consulting revenues in order to be profitable, we will provide an honest, objective and thorough assessment as to whether you are ready and right for franchising.
Create a Budget
Expanding your business requires expenditures even if it is only across town. As a startup franchisor, you will be responsible for all the costs associated with the franchise system. Franchise Help provides a few necessary and potential costs to be considered in a startup budget:
- Training programs
- Operational manuals
- Sales and marketing materials
- Personnel recruitment
- Accounting and legal fees
- Research and development
There are many variables that can affect the cost of your business because every franchise is different. However, you can find the right financing option by analyzing the specifics of your business.
Consider the Financing Options
After you have figured out the projected costs needed to start your franchise, you can choose between debt financing and equity financing. The amount of knowledge and experience you have with the franchising industry can sway your decision either way.
The ideal option would be to self-finance, meaning that you save the money necessary to start your franchise and pay cash up front for the work to be done to get your business ready to franchise. It is much easier to start a franchise using your own capital rather than borrowing to do so.
However, given that to start a franchise properly may cost you in the neighborhood of $150,000 to $200,000, self-financing may not be an option. In that case, two other considerations are debt financing and equity financing.
Debt financing includes finding a lender that is willing to give you capital based on the assets of your business. The terms of repaying the lender will include added interest and other considerations. Though debt financing is a popular option, the cost should the franchise fail would be considerable, as whatever collateral was necessary to obtain the loan may be at risk. The Small Business Association has many loan options for franchisors to choose from.
Equity financing includes finding an investor that can finance your expansion for a percent of ownership in the business. While you will not be able to maintain 100 percent ownership with this option, you can negotiate the terms of the deal so both parties get what they want. For franchisors that need assistance in the franchising process, gaining an experienced partner could be helpful to expand their business, and the overall cost of the equity relinquished may be small in comparison to the upside of their growth potential.
Choose Your Source of Capital
Between equity and debt financing, there are many available sources of capital that are helpful to know about:
- Investment banks ‑ Assists individuals and businesses in raising capital by acting as their client’s agent in the issuance of securities. These banks offer equity financing by charging fees and commissions for these services.
- Private equity firms ‑ Grants investment capital to individuals and institutions with a high net worth and/or growing business. These firms offer equity financing but are usually looking to divest in five to seven years.
- Venture capital ‑ Made for entrepreneurial and smaller companies that need capital. These funds provide equity financing for companies that have high risk/high return profiles.
- Commercial lending ‑ Allows a business to obtain capital to fund short-term expenditures. This lending is backed up by loans and non-conforming assets like real estate.
Partnering with Winmark
At Winmark Franchise Partners we have experience working alongside a variety of franchisors and entrepreneurs. We understand the needs of a startup franchisor and we have served as an active investment partner. For the right person with the right concept, Winmark Franchise Partners can serve as both equity partner and personal growth advisor, using our 30 years of experience as a franchisor to help you achieve your growth objectives.
We can help your business expand into a successful franchise by providing the guidance you need. As a franchise incubator, we have the knowledge and capital to get your brand on the right track. If you are interested in franchise growth, contact us at (866) 994-5191.