How to build Franchise Investors

Our coach explains getting your franchise invested by hard-to-reach outside investors.

Opinions expressed by Entrepreneur contributors are their own.

There is no doubt about it–franchises are popular. For someone seeking to escape the confines of their boring cubicle, there’s something definitely appealing about investing in a "business in a box" that takes the mystery (and at least some of the chance) out of starting your own business. Quoted statistics on the success of franchises are also pretty impressive:

  • Success rates for franchises are higher than 90 percent, causeing this to be the cheapest failure rate of any kind of business.
  • A 1999 U.S. Chamber of Commerce study discovered that 86 percent of franchises were still beneath the same ownership and 97 percent of these were still running a business after five years.
  • A seven-year study discovered that 91 percent of franchised businesses were still operating in comparison to only 20 percent of individual startups.

( Note: These statistics were extracted from information entirely on FranchiseUSA.net )

You’ll receive no arguments from me about some great benefits of a franchise business. Just recognize that if you’re have to help financing the acquisition of this franchise, you will most probably find few takers in the professional investment community. Now i want to emphasize that I really do not consider banks to be area of the "professional investment community." Typically, banks can help finance the purchase of a franchise if a credit’s bad and you will need another individual (angel investor) or capital raising firm to obtain the cash, there may be a problem. Here’s why:

1. Franchises could be expensive. Generally, the more costly the franchise, the more earning potential there is for you personally (to put it simply, "hot" franchises cost more because they earn much more). To begin with, you must pay to get the right to utilize the franchisor’s name and gain its assistance in assisting you succeed. This fee can include all of the following:

  • Franchise fee. This fee, which might be nonrefundable, can cost thousands of to many hundred thousand dollars. Furthermore, there can also be costs to rent, build and equip an outlet also to purchase initial inventory. Other costs can include operating licenses and insurance. There can also be a "grand opening" fee to the franchisor to market your brand-new outlet.
  • Royalty payments. The franchisor may charge royalties predicated on a share of your weekly or monthly revenues. This can be true even if your outlet hasn’t earned significant income. Royalties are often paid for the proper to utilize the franchisor’s name so even if the franchisor does not provide promised support services, you still may need to pay royalties throughout your franchise agreement.
  • Advertising fees. Along with everything else, you could have to pay into an advertising fund. Some part of the advertising fees may choose national advertising or attracting new franchise owners, plus some may even head to target your unique outlet.
  • Just how much money how about? This will depend on whether your goal is to just own an individual franchise or to buy a master franchise that generally covers a particular geographic territory. For some, just the single franchise purchase will be daunting enough. Here’s only a small sample of what some can cost, including working capital:

  • Molly Maid: $65,000–$103,000
  • Mr. Handyman, LLC: $86,000–$127,000
  • AAMCO Transmissions, Inc.: $198,000–$222,000
  • Carl’s Jr.: $783,000–$1 million
  • AIM Mail Centers: $110,000–$180,000
  • Granted, some franchisors could be willing to have a down payment only 20 to twenty five percent of the full total, but you’d better have excellent credit and a net worth more than $250,000.

    2. The franchisor is king. Here’s the true problem. If you’re seeking to get an outside investor to greatly help fund your entry into this sort of business, remember that this isn’t your business ! It is the franchisor who has generated this business, managed to get successful and can always maintain control over whatever would threaten that. Thus, any outside investor is very reliant on two uncontrollable variables: you and the whims of the franchisor. That is why most franchises are financed by second trust deeds on homes, loans from relatives, and/or borrowed money from IRA or pension funds (make sure you consult with your tax advisor if you are considering this latter.)

    3. The true money is in multiple franchises. Running a single franchise will, generally, permit the franchisee to generate a modest income for themselves however, not offer a great go back to any investor. Thus, if you wish to pursue this plan with vigor, you must think multiple franchises. Such a technique could be pursued on a one-at-a-time basis or could be attempted via acquiring what’s called a "master franchise." However, the former strategy could be slow and costly, and the latter will not be easy for the older, more developed franchises.

    As an exclusive investor, the only investment strategy that may interest me is always to choose master franchise. The task, however, is in determining if my partner (the main one who’s likely to do all of the work) can actually achieve success at creating a franchise. Here, your choice is simple. As an exclusive investor, I’d only choose partner who includes a clear and proven background for building successful franchises previously. I just can’t afford to purchase someone who’s never done this before.

    So what’s underneath line on getting another investor to get a franchise with you? Unless you’ve done this before and so are now looking to dominate a big, multifranchise territory, you are going to have your projects cut out for you personally. Outside investors are rarely your ticket out of your cubicle. For that, you are going to need to bite the bullet and dig deep into your own pocket.

    Jim Casparie may be the "Raising Money" coach at Entrepreneur.com and the founder and CEO of The Venture Alliance, a national firm located in Irvine, California, that’s focused on getting companies funded.