Franchise Buying Guide

Small Bucks

Not every franchise comes with a McDonald's-sized price tag.
Presented by Guidant Financial
Guidant Financial specializes in helping entrepreneurs purchase new franchises using their retirement funds.

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."

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