The franchise industry continues to grow at a record pace. One out of every eight jobs in the country is related to franchising in some way. One prevalent trend is the continuing growth of emerging franchise brands. A generally accepted definition of an emerging brand is a system with under 50-75 operating units, and a micro-emerging brand has under 12 units. Emerging franchise brands are more common than ever.
While funding emerging brands under 75 units may present unique challenges, FranFund has the expertise to simplify the process for candidates of both emerging and established brands. FranFund has helped countless entrepreneurs fund their dreams of owning a franchise regardless of the industry, sector, or location.
#1: Understand Key Differences Between Emerging And Established Brands
A candidate considering an emerging brand would be wise to consider a few crucial points relative to funding that will impact their ability to obtain the funding they need. For example, recognizing that the first 20 franchisees of a new system must have a strong financial history and sufficient capital. These candidates will establish a reputation for the emerging brand in the lending community. This reputation can go two ways: 1) having 20 high-performing franchisees that validate well; or 2) having franchisees within that 20 that default on their SBA loan. Lenders view a loan default as both the candidate/borrower's and the emerging franchisor's responsibility. An oft-repeated phrase in the franchise industry is "businesses fail for a number of reasons but being over-capitalized is not one of them."
The funding solutions available to the candidate of an emerging brand will depend on the total project cost. The total project cost (TPC) is the cost of the franchise fee, equipment, marketing, licensing, leases, etc., plus working capital. Emerging brands do not have the benefit of a regional or national reputation that would generate immediate lender interest. We need to bring a financially strong borrower to the table for an SBA loan to mitigate that issue. Put simply, because emerging brands do not have "strength of brand”, that strength must be found in the borrower.
#2: Funding Strategies For Emerging Brands
Two of the most common capitalization strategies for candidates of an emerging brand are Rollover for Business Startup (ROBS) and Small Business Administration (SBA) loans. Other solutions I’ve seen for funding emerging brands may include:
Signature loan (unsecured)
HELOC (home equity loan or line of credit)
Candidates/franchisees of emerging brands can use a combination of these as a complete funding strategy.
#3: 401(k)/IRA Rollover
Utilizing a rollover program such as FranFund's FranPlan® allows candidates to access their qualified retirement savings tax-deferred and penalty-free to invest in their business. The IRS affectionately refers to this process as ROBS or Rollover for Business Start-Up. Using this program, the candidate/franchisee invests their IRA or 401(k) from a previous employer into their new business. At the end of this transaction, the new company operating account has cash available for any legitimate business expense, and their new 401(k) has shares of stock equal to the initial investment. As the business grows and prospers, the value of the stock grows, often performing better than your stockbroker! Using this option as the entire capitalization strategy means that the new franchisee can open their doors with little or no debt and therefore reach break-even sooner. However, you can also use this product paired with a business loan for the down payment (also known as equity injection) for the loan. The IRS, however, does have strict guidelines regarding the execution and maintenance of the plan. FranFund offers the IRS-mandated Third-Party Administration (TPA) service to ensure your retirement plan maintains the IRS compliance requirements.
#4: SBA Loans
The Small Business Administration (SBA) provides a guaranty to lenders to incentivize them to consider riskier loans. Generally speaking, lenders think all business startups and first-time business owners are risky. The lender's number one objective is to be comfortable with the borrower's ability to repay the loan. The SBA program works with lenders to offer business loans for startup, acquisition, expansion, and working capital with values available up to 5 million dollars. At FranFund, we have developed a portfolio of SBA lenders across the country that understand the value proposition of the franchise industry and are interested in franchise loans, including emerging brands. Your funding partner's role is to help prepare a loan package and shop the loan to our lending network to get your candidates the best rate and terms on their emerging franchise.
#5: How To Know Which Options Are Right For Emerging Brands
Around the internet, candidates may find interactive funding or pre-approval tools that allow input of key information about assets, credit score, investments, available cash, etc., allowing them to calculate a funding amount for which they qualify. FranFund offers a tool for this. However, there can be tremendous variables these tools are unable to accommodate. The most efficient, effective, and accurate way to get an assessment and pre-qualification is to speak to an expert franchise funding consultant. It is advantageous to work with a funding partner such as FranFund, who uses a franchise-specific pre-qualification, has extensive expertise in the franchise industry with emerging brands, and has relationships with lenders who are comfortable working with an emerging brand franchise model.
If you’d like me to find your franchise match, please schedule a brief call with me.