Some companies have innovative programs to help prospective franchisees get their start. Allegra Network, a graphic communications franchise, helps new franchisees acquire independent printing companies to convert into Allegra franchises. Allegra usually arranges for seller financing, letting the franchisee put down about 25 percent to 30 percent and then pay prime plus 2 percent, on average, over a three- to 10-year period. "The seller functions as the bank," says development manager Robert Miller. "The purchaser [should have] the ability to pay the down payment, support the debt service, pay a royalty and provide a reasonable quality of life [for themselves] while building that business."
Firehouse Subs also offers a deal: Through its American Dream program, successful managers of company-owned stores can purchase an 18 percent share of their store's revenue stream for $5,000. After three years, they can purchase their own franchise, and Firehouse Subs will lend up to $150,000.
Incentives also exist for minority groups. Several hotels, including Choice Hotels, InterContinental Hotels Group and Marriott, have reduced application fees and royalty fees for minority investors.
Cracking the Nest Egg
In recent years, more franchisees have tapped their retirement savings to finance their purchase, thanks to financial solutions offered by firms like BeneTrends, FranFund, Guidant Financial Group and SDCooper Co. For a fee of about $5,000, you can transfer 401(k) or other qualified retirement assets to the retirement plan of a new C corporation. That plan then invests the money to start up the franchise-and you pay no penalty for early withdrawal.
Even if you take out a loan, you can still use your retirement assets as a down payment or a nice cushion until the profits get rolling. David and Laura Mann took out a loan for 100 percent of the purchase price of their first Great Clips franchise in Houston, but worked with FranFund to set aside funds from two IRAs for unanticipated expenses. Since owning the franchise is a part of their retirement plan, David doesn't consider it any more of a risk: "We're just taking a piece of our long-term savings and diversifying."
One advantage to signing up with an established franchise company is that you're more likely to benefit from third-party arrangements with lenders, leasing companies and other capital providers. For instance, McDonald's, one of the pioneers of third-party lender arrangements, helps new franchisees get lower rates from Chase Bank through the Chase McDonald's Finance program.
Some fast-growing franchises, sensitive to the hefty cash-down requirements that can be a barrier to entry for some franchisees, have struck deals with lenders. Cold Stone Creamery worked with its SBA lenders-Banco Popular, CIT and UPS Capital-to lower the franchisee capital investment. "[Lenders] usually require anywhere from a 25 percent to 30 percent cash injection," says Dan Beem, vice president of profitability for the ice cream franchise. "We've leveraged our brand to get that equity injection down to 15 percent for the first store and 10 percent for any subsequent stores or acquisitions."
Similarly, Minneapolis-based Dunn Bros Coffee has relationships with third-party lenders that let qualified applicants put down only 10 percent to 20 percent of the total initial investment, with a term of up to 10 years.
The Big Question
The first question on the minds of most prospective franchisees is "How much money can I make with one of these franchises?" This question creates a dilemma for most franchisors for two reasons: First, no one knows how well the franchise will do, and second, franchise laws impose tough standards on the performance information, or earnings claims, a franchisor can deliver to a prospective franchisee. The rule is that if a franchisor provides any performance indicators or projected sales/profits/revenue, the information must be laid out in Item 19 of the company's Uniform Franchise Offering Circular. Most franchisors will simply sidestep the question and refer you to their franchisees.
Wait! Your potential earnings, and the earnings experiences of other franchisees, are important subjects. Why shouldn't franchisors be required as a part of the disclosure document to provide at least part of the answer to that question? Why not require franchisors to simply list the gross revenue of all their franchisees in the past year, or give us the average sales? A number of industry commentators have made that point, but the regulators (the FTC and officials from a dozen franchise registration states) aren't convinced. Where, then, can you find some answers to The Big Question?
- Franchisees are probably your best source of performance information, regardless of whether the franchisor includes earnings claims in the UFOC. They can also give you a vital perspective on other aspects of the franchise. Talk to several franchisees-the financial performance of just one or two may not be representative.
- All UFOC documents will include extensive information on the total fees and expenses associated with the franchise purchase (see Items 5, 6 and 7); this will give you a great jump on your business planning.
- A good accountant can help you prepare a break-even analysis and make some reasonable projections for your new business. This financial planning process is at the very core of business planning, and an accountant will be a vital member of your team.
- Talk to an account manager at your bank if it does a lot of work with small businesses. He or she may be of help in making your financial projections.--Andrew A. Caffey
The Golden Ticket
After begging family, friends and banks for startup capital, are you still strapped for cash? Ace Hardware has dreamed up the Dream Ace Promotion, an enticing contest that might just make your dream of entrepreneurship come true. The hardware and home-improvement company is offering a million-dollar opportunity to the top aspiring individual in the country who can demonstrate leadership abilities, people skills, business acumen and community involvement. The winner will be awarded an Ace Hardware store that's fully staffed, fully stocked and ready to go.
Interested? Apply online anytime during the month of January at http://www.dreamacehardware.com. After a multistep selection process, the winner will be announced in March and granted ownership of the store in July. "This is even better than a million-dollar lottery ticket because we're giving away a business that has earning potential for years and years," says Paula Erickson, director of advertising and brand development. "We really want those people who are serious about being an entrepreneur to be a part of this competition."--Sara Wilson
C.J. Prince is Entrepreneur's "Dollar Signs" columnist.