Fundraising For Early-Stage Startups – How To Raise Capital For A Franchise

How to raise capital for a franchise is the next step after working out the brand you want to purchase. The US has several top brands that present viable opportunities for running a successful business.

Investing in a franchise is a smart proposition since this sector is booming with over 1,000 options. Between 2022 and 2027, the market will likely grow at a CAGR of 9.58% and reach $4454B.

Although most brands are from the food and beverage sector, logistics and fitness companies are thriving, too.

Purchasing and running a franchise has several benefits, like an established customer base and a portfolio of tried-and-tested products. You’ll take advantage of a hybrid business model, which you can run independently like a sole proprietor. At the same time, you’ll also leverage corporate pros.

As for the cost, you can expect to invest from $10K to $5M, with most brands costing $100K to $300K. For instance, a well-known name-brand franchise like McDonald’s costs around $500K to $1M to start.

Even though the price tag seems discouraging, you could consider a blend of sources to tap.

Understanding the Expected Capital Investment and Business Plan

The ultimate cost will depend on the business you intend to purchase and the expected initial and working capital. It’s always advisable to do the necessary research and work out precise estimates for the capital you’ll need.

Factor in funding to kickstart and sustain the business until it starts generating revenues and profits. Next, you’ll create a business plan that details the expected costs, sources of revenues, and the target market.

Check out the Federal Trade Commission to get more information about the franchise you intend to purchase. All franchisor corporations are required to file a Federal Disclosure Document, which is available for research.

You’ll also learn about the fees payable to the franchisor, operational guidelines, and the applicable fee to purchase the franchise. Next, put together a compelling pitch to entice investors to back your project.

The brand name is the most attractive slide in your deck. However, you’ll also demonstrate that you, the founder, have what it takes.

How to Raise Capital for a Franchise – Start By Approaching the Franchisor

When you’re looking for capital to launch a franchise, approaching the owner is a great step in the right direction. You can expect complete support with selecting the appropriate site and negotiating the lease. Typically, bigger brands have dedicated in-house teams they assign to new franchisees.

You’ll also get assistance with procuring equipment and inventory and hiring trained talent to run the facility at economical prices. The owner may also authorize capital for the initial inventory and other essential supplies you need.

Operational and financial support can be invaluable in managing the budgeting, accounting, and tax reporting aspects. Compliance with regulations and local rules and applying for and getting licenses are other areas where you’ll get assistance.

Getting these operational and establishment processes in order helps you save not only time but also money. You’ll have the business up and running quickly and well-optimized for efficiency and productivity.

To start a franchise business, you’ll pay an initial investment fee to the franchisor. However, if you can propose a viable location and business plan, you could earn a deferral or partial waiver of the fee.

Franchisor Loans

When you need funding, the franchise owner may connect you with their network of investors. Or even offer startup capital at attractive interest rates and other terms and conditions. Keep in mind that the entrepreneur’s attitude and enthusiasm go a long way when impressing investors.

The franchisor may have certain criteria for approving your application, like a positive net worth with more assets than debts. So, be prepared to attach a personal net worth statement with the papers. Any other assets like stock and vehicles can also act as collateral for the investment.

Also, expect to demonstrate a minimum amount of liquid assets. This liquidity should be adequate enough to cover personal living expenses, startup costs, and other expenses the business may incur. The money should provide the runway until the franchise starts generating revenues and profits.

Since the franchisor may conduct a credit check to verify your credibility, fixing inaccuracies is advisable. You’ll also put together a business plan detailing the expected expenses and revenues. Having a history of building successful businesses also raises your chances of getting approval.

Bootstrapping

Investing your personal funds into the business is a great start, but it also comes with a share of risks. At the same time, having skin in the game not only motivates you but also convinces the franchisor and investors. Considering your commitment to the project, they are more likely to buy in.

If you’ve previously held a corporate job, you could consider leveraging your 401(k) retirement plan for funding. The IRS allows you to withdraw 50% of your savings to start a business. Going with the ROBS (Rollovers as Business Startups), the new franchise can create a 401(k) for its employees.

Business owners can transfer their old 401(k) funds into the new company 401(k). Next, they borrow the funds and use the money to launch the franchise. To execute this plan, make sure to get expert legal advice from professionals. Although legal, the IRS considers ROBS questionable.

Aside from personal savings and retirement plans, consider taking out loans against the accrued equity on your home. A Home Equity Line of Credit, or HELOC, comes with attractive interest rates and repayment programs. But the risk of losing the asset is very real.

When exploring options for how to raise capital for a franchise, you’ll also reach out to friends and family members. Make sure to treat these loans as any other investment with legal loan agreements and carefully specified repayment terms. Also, maintain complete transparency with transactions.

While these funding sources are a good starting point, you will need more as the business scales. Search out alternative sources and compare their lending rates and eligibility criteria well in advance. The right time to learn how to raise capital for a franchise is well before you need it.

Apply for a Bank Loan

If you’ve always maintained a good relationship with your bank, a personal loan could help you get started. You’ll present information like business and investment plans, market research, and franchise brochures and materials.

Also, attach copies of personal tax returns for three years and details of how you intend to source the down payment. A well-known brand name and a history of consistent sales and cash flows are good positives. Having a good credit score always helps the process along.

At the same time, be aware of the potential risks. Defaulting on a personal loan not only impacts your credit score but could affect your credit rating for years. Getting finance becomes more challenging. Sourcing capital from third-party investors and partners will allow you to diversify the risk.

Keep in mind that in fundraising, storytelling is everything. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.

Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.

Loans Backed by the Small Business Administration (SBA)

When scouting around for options for how to raise capital for a franchise, consider reaching out to the SBA. This organization partners with several commercial banks and can assist you in getting capital. Here’s some additional information:

• A federal agency, the SBA, partially guarantees loans in case the borrower defaults, offsetting some of the risk. Guarantees are of up to 85% of the loan amount.
• Startup owners can avail of benefits like lower interest rates and extended repayment terms, typically longer than commercial banks.
• Type 7(a) loans are suitable for franchises.
• Close to 10% of SBA loans are allocated to franchises, ranging from $250K to $500K. The maximum loan amount can be a maximum of $5M, specifically for a franchise or small business.
• Borrowers who intend to use the money as short-term capital or for purchasing equipment get five to six-year repayment terms. However, they must have a good credit rating.
• As with other bank loans, you provide statements like the business plan, balance sheet, P&L statement, cash flow statement, and tax returns.
• Businesses that have SBA backing typically have annual revenue of more than $180K. They have been operational for more than four years and have a credit score of 680.

Crowdfunding Platforms

Several online forums are now available with multiple small investors offering small funding amounts. You can sign up on these platforms to get support for your franchise startup. Aside from interest, you can also interest investors with offers of products, stock options, or other returns.

Applications and pitches are run online via the Internet and allow small investors to back projects that interest them. Here’s a quick overview of your options.

• Facebook – Franchise owners pay a platform and payment fee of 6.9% + $0.30. Withdrawal is right away, and deposits take more than seven days. FB does not have a donor guarantee policy.
• Fundly – Franchise owners pay a platform fee of 4.9% and a payment fee of 2.9% + $0.30. Withdrawal is immediate, and deposits take two to five business days. This platform has raised a total of $330M, but customer support is only available via email in limited hours.
• GoFundMe – Franchise owners pay only a payment fee of 2.9% + $0.30. Beneficiaries and donors get security from fraud, and the platform has raised a total of $15B.
• Indiegogo – Franchise owners pay a platform fee of 5% and a payment fee of 3% + $0.30. Its funding terms are flexible, though it primarily supports hardware and tech-driven startups.
• JustGiving – Franchise owners pay a platform fee of 0% to 5% and a payment fee of 2.9% + $0.30. This platform has 22 million supporters but limited customer support hours via email.
• Kickstarter – Franchise owners pay a platform fee of 5% and a payment fee of 3% + $0.20. The platform has raised a total of $3B and has 15 million supporters but approves individual fundraiser campaigns before launch.

Loans for Purchasing Equipment

If you need capital to purchase equipment, get loans specifically geared toward equipment. Since the assets you purchase will act as collateral for the loans, applying for and getting approval is easily done.

However, if you cannot keep up with payments, the lender may repossess the assets, which is a downside.

The SBA offers the 504/CDC loan program for purchasing major fixed assets, like machinery, tools, and equipment. But you can use the capital to purchase real estate and renovate your premises. If you’ve invested in a restaurant franchise, the 504 loan is for commercial kitchen equipment.

The maximum loan amount for the CDC of the 504 loan is $5M, and terms may extend up to 25 years. One of the conditions for getting this loan is creating or retaining one job for every $75,000 you borrow.

Regardless of the capital sources you intend to approach, you should know how to put together an investor outreach strategy. Not sure how to do that? Check out this video I have created.

Other Partners and Investors

Bringing in a partner who can bring industry-specific expertise, capital, and other assets to the table is another strategy. You’ll offset some of the risks, and pooling capital lowers your dependence on external investors. However, you’ll also share the profits and decision-making powers.

When working out how to raise capital for a franchise, you can also consider reaching out to angel investors. Although convincing angels to back your project is not easy, you can leverage a great pitch backed with compelling statistics.

Present findings from extensive research, and you might attract their attention. Make it a point to attend networking events armed with an elevator pitch, and you could be successful.

The Takeaway!

Purchasing a franchise business and setting it up is comparatively easier than most other companies. However, entrepreneurs should be aware of the potential pitfalls before diving in.

Start by learning everything you can about the business on the International Franchise Association website.

Aside from valuable information, you’ll also access resources like special scholarship programs and funding grants. You will also find sources for getting leases, finance, and other support, some dedicated to graduating students and others available to everyone else.

You can also contact the organization for more details. Leverage all the support available to get your franchise business off the ground.

You may find our free library of business templates interesting as well. There, you will find every single template you will need when building and scaling your business completely for free. See it here.