Raising Money to Start a Franchise Business

Taking on a partner or debt to fulfill your dreams of franchise ownership

Author: Jason Rager

Organization: Franchise Analyzer

About the Author:

Jason Rager is the author of: The Franchise Insider's Guide, the most comprehensive franchise resource available, and No Money Down Franchising, the only system developed to help you buy a franchise business for little or no money down. Mr. Rager has over seven years of franchising experience owning six different franchise brands in three industries. He is also Founder and President of Franchise Analyzer a software company that develops software solutions for the franchise industry.

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In life, the adage: "it takes money to make money" often rings true. In almost every deal I have done to open a new franchise or to buy an existing franchise business I have used another person or company's capital to get the deal done. Whether it was taking on a partner to buy a franchise or borrowing money from a bank to purchase new equipment and have adequate working capital, I have always used another person's capital to buy a franchise business.

Therefore, you should not be afraid of taking on a partner or taking out a loan to fulfill your dreams of franchise business ownership. In fact, I would encourage it - so today I will discuss how to evaluate and present a potential investment opportunity to a partner and why being able to do so is so important for starting a new business(franchise or not).

The Golden Rule to taking on investors for a potential franchise investment opportunity is to perform extreme due diligence. Regardless of how much money you have in the deal, your personal name is on the line. I always say that it takes a lifetime to build up your good name and only five minutes to ruin it. If you fail to act in good faith or fail to act intelligently with another investor's money, you will have an extremely difficult experience raising capital from a partner ever again. With this in mind, I encourage you to build a financial model with conservative assumptions and to choose an opportunity that will be cash flow positive, even if revenues come in significantly below expectations.

While building a financial model may sound intimidating, it really is not. In an Excel sheet, simply write down the revenue you expect to take in during each month. Subtract each expense that you plan to incur each month (rent, wages, taxes, cost of merchandise, office expenses, etc.) and the amount left over is your net income. It's perfectly normal to have losses (negative net income) for your first few months in business, but if you run losses for too long, you will run out of money. So ultimately, you want to break even and become cashflow positive as soon as possible.

When making your financial model, write down your assumptions below the net income line. For example, how many customers do you assume will visit you in a month to reach your revenue number? What is the average revenue per customer? etc. Most sophisticated investors will ask you what assumptions were made to achieve the revenue, cost, and net income numbers in your financial forecast. Having these answers ahead of time will help you while pitching your franchise business to potential investors and creating your action plan for establishing and growing your business.

Once you have a solid financial statement underpinning your rationale for why the franchise opportunity is a good investment, you can put together an action plan for establishing and growing the business. I recommend developing your action plan around solid, measurable milestones and metrics to ensure that you are making progress that is in line with your financial plan. Depending upon the investment size of your project, you may also need a business plan. If this is the case, your financials and action plan can serve as the executive summary to the business plan. Otherwise these two documents will be sufficient for starting a franchise business that requires under $750,000 capital investment.

Once your financial model and action plan become polished begin pitching it to your friends, family, and other potential investors. You will see that over time your pitch will become more polished and you will be able to talk about the details in casual conversation; after all, you never know who may be interested in partnering with you to start a franchise business. Over time if you are persistent and have a good plan you will be successful in getting your deal financed, regardless of the amount of capital you choose to invest in the business personally.

Why is raising capital so important?

Being able to raise capital (both debt and equity) is an essential skill for any business owner. Whether you are starting a new business, expanding your business, or buying an existing business you will need to be able to tap potential equity investors and banks to receive the funding necessary to achieve your business goals. I also want to take this opportunity to emphasize that debt is usually good to have for your business but only if your business is cash flow positive. The reason for this is that you'll receive a higher return on the cash you have invested in the business. However, the amount of debt that you choose to take on is a matter of your personal preference for risk. At the very minimum, I recommend having a "rainy day" business line of credit when starting your franchise business and you should get the line of credit in place now, when you DON'T need it. If you do this, you will have a sufficient cash cushion in the event that things don't go as planned.

Cheers to profitable franchising!