What do you need to start a franchise, and how do you secure the financing to do so?
Most low-cost franchises can be started using either savings, credit or even both, while others require outside financing or loans. For many, franchise funding is available through several, different channels.
Franchises require startup costs like any other business venture. Most of the costs of a franchise come from fees. The fees are not only laid out beforehand; they are carefully scheduled so planning is less complicated and risky.
Franchises typically charge something called “franchise fees.” They range in price according to the franchise you choose. Sometimes you can pay in a lump sum, and in rare cases, you can pay in installments over time. The fees are associated with the costs involved in training, website creation, supervision, etc. The way you pay the fees depends on the franchise agreement. Franchises will not allow you to negotiate franchise fees. It is always a good idea to consult an attorney before entering into any fee schedule or agreement modifications.
Franchise royalties are fees that are ongoing, usually in the form of a percentage of your gross profits. They can also be in the form of a flat monthly fee. Sometimes the royalty percentage can escalate over time, and sometimes it can de-escalate. Typically, royalties are either monthly or weekly, depending on the franchise agreement. Some franchises do not charge royalty fees. It depends on the franchise you choose.
The better you plan, the easier it is to know the costs involved and minimize your risk. It is a fine line to walk to finance a startup. You want to have enough funding on hand, but you don’t want to end up putting yourself in more debt than you need to.
Some franchises will offer specific financing for new franchise owners. They offer incentives such as discounted fees or loans that are based on simple instead of compound interest. Other franchises will assist new franchise owners by connecting them with lenders. You can easily find information about franchise financing through the franchisor by checking Section 10 of the franchise disclosure document.
Angel investors are groups or individuals willing to invest in a business in exchange for partial ownership. If you go through an angel investor, be ready to give up some control over business decisions; it’s likely the group or person you borrow from will want to have some stake in making decisions. Sometimes that is a good thing, especially if the angel investor is knowledgeable and has experience. Other times, that can hinder your ability to make the decisions you feel are correct.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
Author: Seth Lederman, CEO of Frannexus, award-winning franchise consultant and author of “Profits are Better Than Wages”, for Forbes.
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