Learn how to invest your IRA or 401k into a franchise penalty-free. ($50k min)
Be Your Own Boss, Summer 2000
Buying a franchise requires good credit, a sizable down payment and tons of experience in the particular industry that catches you fancy, right?
Not necessarily. To paraphrase an old adage, there's more than one way to buy a franchise. The perfect franchise for you won't necessarily require a million-dollar, McDonald's-sized investment. You can find franchises that boast both high income potential and low cost--but to buy the one you want with the resources you have requires investigation, perseverance and a few facts.
First, the facts. Only 3 percent of this year's Entrepreneur's Franchise 500® charge an initial franchise fee in excess of $50,000; the average was $23,450. In addition, the average initial investment was less than $250,000 for the majority of them.
From that same listing, the top 20 low-investment franchises with total start-up costs below $10K illustrate the diversity of low-cost franchises-besides cleaning franchises, there are exercise programs, shoe-repair firms, publishing ventures, travel agencies, tour operators and even a gift service.
If a low-cost franchise is the route you choose, do your homework. Evaluate the skills you'll need, and determine whether the initial training and ongoing support offered will meet those needs. Once you've narrowed down your choices, review your financial situation. Request a copy of your credit report to make sure all the information is correct. Rectify errors immediately.
If everything is correct but your credit isn't pristine, don't despair . . . unless Uncle Sam's involved, advises Bentley Whitfield, owner of New York City-based investment bank Capital Strategies. "[Credit dings] are the kiss of death for most financiers. If you owe the federal government money or haven't been careful about money owed to the Feds, all sorts of antennae go up."
But don't just assume you have bad credit-Whitfield points out that a lot of people who think they have bad credit really don't. For example, if you get a monthly statement that's due on the first but you don't pay it until the 15th, it's late from the [bill collector's] perspective, but for the purpose of credit it's not late until the 30th day.
If credit is the weak link in your entrepreneurial chain, Whitfield says you can possibly bolster yours by negotiating to offer a larger down payment or kick in additional colateral. "If you have excellent credit and all other issues involved are very favorable," he says, "lenders will loan a very high percentage of the purchase price." Conversely, weaker credit means you'll be lent a lower percentage of the purchase price.
An infusion of cash from family or friends can help, but if you don't know anyone with a few thousand spare dollars lying around, Whitfield suggests finding a more flexible nonbank lender or a company like this with investors willing to back promising ventures.
Whitfield also points out that if you have time to develop a six- or 12-month track record of paying your bills on time, it can help counter the previous late pays, charge-offs and other problems.
"It also helps, when you submit your [loan] application for the lender, to see a team of people-accountant, attorney, etc.-who will help you," he says. "This shows you didn't just think of it last night."
Preparation Before Borrowing
If you want to test the waters with lenders before submitting a loan application, Whitfield advises getting a copy of your credit report, then writing a proposal explaining exactly what you want to do-including information about the market, your management, the competition and financial projections. Submit it all to the lender and make sure you couple the proposal with a request not to run a credit check.
"Honesty is critical," says Whitfield. "Get everything on the table, including everything you view as trouble spots, so they can tell you how they plan to address those issues."
Options For Financing
What Price Success?
If lack of money, as opposed to shaky credit, is your problem, and friends and family definitely aren't an option, you can still make it happen. For example, consider Frisco, Texas-based Babies 'N' Bells. "The ideal candidate for our franchises is a new mother who, rather than going back to the workplace, wants the flexibility of working at home," explains founder Dara Craft. The company currently has 50 franchise units in a total of 19 states and specializes in customized invitations and announcements. The lowest estimated start-up cost is $18,600, including a $7,500 franchise fee.
"We don't check your credit, but look for evidence that you're responsible and have some financial ability," explains Craft, who says single mothers and divorced women with no job experience have been successful with her system.
According to Craft, Babies 'N' Bells even has a payout program in which franchisees are allowed to get started in their businesses and see early sales roll in before they have to start paying $1,000 monthly to cover the franchise fee.
Another option is microloans. Some banks and a number of nonprofit agencies lend up to $25,000 to single borrowers interested in starting businesses. But be aware that often the goal of such programs is to create jobs in specific geographic regions.
An additional source of financing is the franchise system itself. A handful of companies provide a degree of in-house financing to qualified franchisees. These include the medical staffing franchise Nursefinders, GNC vitamin stores, Radio Shack, 7-Eleven and White Hen Pantry.
The in-house financing program RadioShack offers was especially attractive to Lorenzo Max. He opened a RadioShack Select stand-alone store in the fall of 1997 in Tuba City, Arizona, which is on the Navajo reservation. He used $16,000 in savings accumulated from his satellite firm to finance his portion.
"Being on the reservation, I don't own the land," explains Max, whose store is located in the To'h na'nees dizi' shopping center built by the Navajo Nation's Division of Economic Development. "If [the store] hadn't already been built, I would have had to go through a lot of red tape with the Bureau of Indian Affairs [to get permission to build it]."
That's the hard part, adds Max, because banks are hesitant to finance-if he can't make a payment, the bank can't foreclose on the land, as reservation land has special protections. "If I was off the reservation, it would be easy. I'd buy the land, the bank would finance both the land and the building and, if I defaulted, they could just foreclose on me."
Max's location in a small reservation community was a good fit for the RadioShack Select program, which typically features a 500-square-foot store within a store. "Generally speaking, the towns [these stores] go into aren't big enough to support a full-line RadioShack. By co-branding with an existing successful business-video store, hardware, office supply, etc.-they're able to put our product into an already successful location," explains Len Clegg, senior vice president and general manager of franchise operations.
"The franchise store carries 1,900 of RadioShack's bestselling items, and the entire package costs about $60,000, with franchisees expected to put down 20 percent or $12,000," says Paul Crump, associate store marketing director. RadioShack typically finances the rest for three years at 10 percent simple interest. While RadioShack prefers co-branding, they're not averse to opening stand-alone locations, particularly if the potential franchisee has a strong understanding of retailing.
A Franchise Success
The Complete Package
White Hen Pantry, an Elmhurst, Illinois-based neighborhood convenience-store franchise system that features fresh produce, grocery items and a full-service deli counter, also finances the purchase of franchises, but they go even further. "We select the site. We do the demographics, and we provide the land, building and equipment," says the company's franchising manager Gail Bosch. "All they're buying is the inventory."
In addition, White Hen, which only franchises in Illinois, northwest Indiana, Massachusetts and New Hampshire, pays the monthly rent, handles accounting, covers loss prevention and pays store vendors. In exchange, franchisees pay a weekly fee plus 7 percent of sales in royalties.
"It costs an average of $65,000 to get your store up and running, and we like to see franchisees to put down $15,000 to $25,000," explains Bosch, adding that the rest is financed at prime plus 3 percent (at a minimum of 10 percent). In some instances, adds Bosch, a franchisee is able to qualify for a lower down payment.
Michael Murphy is one such franchisee-he purchased a franchise in Pepperell, Massachusetts, in March 1999 with a down payment of only $10,000. "I wanted to keep some money to make sure I had something to fall back on," says Murphy, whose 24-hour store employs 13 people.
Bosch points to Murphy as a typical franchisee who would qualify for a lower down payment-he had worked in the convenience-store industry for years and knew what it took to operate such a business.
Not a Hopeless Situation
Money's No Object
Believe it or not, if coming up with the money is just plain impossible, you still have options. Some franchise systems, like GNC, accept partnerships in which one person has the business savvy and the other the money, and sometimes even a relationship in which the investor is a silent partner. According to Russ Cooper, GNC Franchising Inc.'s senior vice president and general manager, their units range from $118,231 to $173,031. Prospective franchisees must put up $60,000 cash; the company finances the rest.
Obviously, the axiom, "Where there's a will, there's a way," definitely holds true in franchising. But the right combination isn't going to fall into your lap. It takes perseverance, flexibility and creativity to find the blend of franchising and financing that works best for you.