In early 2020 I was talking with the franchisor of a gym concept in Texas. Let’s call the franchisor Dave to make things easier. “Dave” and I were walking through his sales and finance process. Four years earlier, Dave had opened up his first store. A year later, he opened up his second store. One of his clients, who had been traveling over 30 miles away to one of his gym’s, asked him if he would be interested in franchising. Fast forward to today, and Dave has two company-owned locations and supports one franchisee.
Dave was frustrated, the first sale was so easy, but he had not found the success he thought he would. Like many emerging franchisors, Dave had been doing everything the business required. He was the CEO, CFO, CMO, CRO, and CTO of his organization. While all of this kept him busy, Dave did have a lot going for him. He had a healthy Item 19 in his FDD, and he had a relatively steady flow of leads.
I love fitness concepts. They often have starting costs of less than $200,000 and there are a lot of entrepreneurs out there that are truly innovating in this space. While many in the fitness world love what they do, they often struggle with the finer points of running a business. That is why I believe franchising is perfect for the fitness industry.
As we walked through the sales process, there were a few common steps where Dave was losing his prospects. I asked him how he envisioned most of his candidates would finance their business? Although Dave was a smart guy, but he hadn’t thought about this. He just assumed they would get a business loan as he did.
I asked Dave, “How did you get your loan?”. He replied that he had a good friend he had been banking with for years. After he collected a hefty bonus from his previous corporate job, he got a loan and started his business. The more we talked, the more he had questions about the different funding options available. Unfortunately, most candidates don’t have $200,000 sitting around, so they would need to get a loan.
That was my inspiration for writing this article. I hope by the end of this article, you have a better idea of the funding options for your prospects to start their business so you can better help them navigate the process.
A second advantage of having a level of knowledge of financing options is it will save you time. You should be doing some financial due diligence early in the sales process. Having some of this knowledge will help you determine if a prospect is financially viable.
Bootstrapping
Depending on your concept, bootstrapping may be a viable option. Bootstrapping in business means starting a business without external help or working capital.
Especially for concepts that have estimated opening costs of less than $100,000, this may be a viable option. However, you must remember that with bootstrapping, they also need to have enough access to liquidity for working capital. While having enough to start the business is excellent, you also want your candidates to have enough capital to weather a few down months, especially at the beginning.
This is somewhat easy for franchisors to verify during the sales process. If a candidate indicates they will be bootstrapping the business, they should be able to provide enough evidence to show they have the funds available. Assuming their liquidity and funds check out, this is by far the fastest and easiest way to finance a business.
Friends and Family
Raising money from friends and family is similar to bootstrapping. As a franchisor, you want to make sure you know who will all be signing the franchise agreement. Obtaining money from friends and family can come in many different forms. If that money is put into the business with an expectation that there will be an ownership interest attached, these individuals will need to sign the Franchise Disclosure Document.
As with bootstrapping, a franchisor will want to make sure that they are getting some sort of proof of their finances.
A Bank Loan (Non-SBA)
For our purposes, I will distinguish between bank loans. A non-SBA bank loan is one in which the SBA has not provided a guarantee. These loans are often harder to get; however, if they can be obtained, the process to secure financing is most likely easier.
In my experience, this type of loan often requires an existing relationship with a banker. Just like with a home loan, there is a required down payment. The down payment depends on many factors, but generally equals 20-30% of the total investment.
In my experience, this type of loan often requires an existing relationship with a banker. Just like with a home loan, there is a required down payment. The down payment depends on many factors, but generally equals 20-30% of the total investment.
The timing of obtaining this commitment letter can also be tricky. Often, to keep the sales process moving, you may not be able to get it until just before the signing of the franchise agreement.
SBA Loan
SBA lending is where approximately 80% of franchisees obtain financing. If you are not familiar with SBA lending, you should take some time to learn about the various programs. Many times it will be the franchisor who is tasked with educating their prospect about these programs. The SBA has several different lending programs that may be appropriate for your brand.
The SBA lending process can be long and intimidating. I often tell my prospects that it makes financing a home look like child’s play.
I won’t go through the entire process, but here are a few notes. First, the whole process usually takes 8-12 weeks. It is essential to get a prospect started as early as possible in the process.
Second, contrary to most people’s beliefs, the loan is not obtained from the SBA. Instead, the loan is merely guaranteed by the SBA. The loan is secured through a regular bank.
If a prospect has a banking relationship, that is a good place to start. The next option would be to literally walk into a bank and ask to talk with the SBA lender. Another option would be to refer them to any SBA banker that has already worked with your brand, whether it be with you directly or with another one of your franchisees.
However, there is a fourth and best of all option. There are SBA Brokers who work specifically with franchisors to help their prospects through the process and secure financing. Best of all, these brokers often get to know your brand somewhat so the candidate can have a little more comfort. There are both good and bad SBA brokers, so make sure you or your CFO correctly vet them.
Lastly, just like a regular loan, the SBA version requires a downpayment. This downpayment will equal anywhere between 20-35% of the total investment. Similar to the other options, there needs to be a process in place to make sure a prospect has this sort of liquidity available.
Everything Else
Those are the four primary options for franchisees to fund their business. However, in talking with over 400 prospects over the past four years, I have heard many more ideas….crowdfunding, angel investors, and credit cards.
Perhaps the one other method to quickly mention is using a 401(k) to fund a business. I am not a fan of this method because I believe that some things are sacred and should not be touched. A 401(k) plan is one of them. However, I completely understand those who don’t share my view. Thanks to provisions in the tax code, a prospect can tap into a 401(k) without penalty if they follow the right steps. The steps are simple enough but legally complex, so they’ll need someone with experience setting up a C corporation and the appropriate retirement plan to roll their retirement assets into.
Why Does Having a CFO Help
Having a CFO in the sales process is vital for growing a franchise system. The two biggest questions that a prospect has often need a financial perspective to answer them. The first question is, “How much money can I make?”. While the CFO is under the same rules you are, they can help coach the prospect to develop their projections and earnings.
The second question is, “How am I going to get enough funds to start my business?”. We’d all love to have prospects that are financially savvy enough to answer both of these. Reality is, most aren’t. A CFO can help properly vet candidates as well as help them determine how to obtain financing.
Lastly, having a CFO gives candidates the confidence to keep going through the process. They are talking with someone who understands numbers and finances and can help provide them with the answer they need. CFOs are typically not very good salespeople, which gives them even another layer of credibility. I can speak from experience. I often tell it how it is. Prospects grasp on to that and will appreciate the authenticity.
The goal was to give you a level of understanding of the primary funding options available to your candidates. Based on the option your prospect indicates they wish to pursue, you also now have a few quick tips to save yourself time and money in the sales process.
About Krieger Analytics
My name is Matt Krieger, and I am the founder of Krieger Analytics, a CFO advisory partner for small businesses and franchisors. I am also the owner and franchisor of a concept called Monkey Bizness, in Denver, Colorado.
As a small business owner with a background in finance and strategy, I realized the benefits that a CFO could bring to smaller organizations. Most franchisors and small business owners don’t have a need (or budget) for a full-time CFO. To better fit my clients, Krieger Analytics is a part-time resource. While most think of CFO’s being involved in finance and accounting (we are), I am also involved in much more. I partner with my clients by coaching them on strategy, gaining clarity on their business, building efficient and effective processes, and making confident business decisions. Conversations are free, so don’t hesitate to reach out to me at [email protected]