do not cut corners when it comes time to developing your franchise system. Brewer explains, “Be sure to work with an attorney who deals with franchises on a daily bases. Franchise laws change often, so it’s important that the attorney you are working with is knowledgeable about the current laws.”
Also, take the time to properly set-up your legal entity to shield your personal assets. “If you fail to work with a qualified professional who’s familiar with the franchise industry, you could end up paying twice as much trying to undo something that was done incorrectly,” Brewer says.
The IFA provides a list of professionals such as attorneys, consultants, suppliers, and others in the franchise arena that can help. To find out more information about franchising or to become a member of the IFA, go to www.franchise.org.
Secure your finances. Franchising is an expensive undertaking. Unfortunately, many franchisors fail because they simply do not have enough money to run the business. The amount of capital needed is contingent upon the scope of the expansion plan. Franchise fees alone can run from a few thousand dollars to over a million dollars depending on the business. Other costs include franchise development, legal, and marketing fees, to name a few.
To finance your endeavor consider:
Small Business Administration (SBA): Competitive rates make this a cost effective solution to financing. Look into the 7(a) and CDC/504 loan programs. Information about these loan programs can be found at www.sba.gov.
Specialty franchise financing: Commercial lenders specialize in franchise financing through structured term loans and equipment leases.
Joint venture: Share responsibility and ownership of the franchise with a business partner you can trust.
Local businesses, family, and friends: Have individuals and/or organizations give financial support or purchase stock in your business.
If you can find individuals who believe in your idea and are willing to financially support your business, then great. This is a practical solution, especially when getting a loan from the bank not an option. Borrowing from family and friends gives you more flexibility in terms of your payment schedule. You also retain most of the business’ control and it builds camaraderie amongst the group.
However, do not take this relationship. Conaway states, “I highly recommend that you treat this relationship just like any other formal business agreement. It’s imperative that you set-up some type of agreement or contract with those individuals you receive money from.”
The contract should outline the terms of the agreement and include variables such as your payment schedule, the interest rate (if applicable), and the percentage of funds invested by all individuals. It is a binding document that requires all participating investors to sign. Be honest and do not take advantage of those who support your enterprise. Losing relationships comes at a high price.