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Franchise Buying Guide

Fun With Funding

The Franchise Factor
Presented by Guidant Financial
Guidant Financial specializes in helping entrepreneurs purchase new franchises using their retirement funds.

Richard Weber, 49, used a variation on that theme when he purchased a Batteries Plus franchise in Texarkana, Texas, last year. He was ready to visit as many banks as necessary-until his father-in-law presented him with $100,000. "Excited about the business, he gave us what would have been inheritance money," Weber recalls. "With my business plan reflecting $100,000 in capital, I got a loan from the first bank I visited."

Weber, whose father-in-law is now a partner, believes banks "are more apt to lend money to franchisees rather than independent start-ups, even [those with] a great idea." If you're considering a franchise, "keep in mind that banks like successful franchises rather than new, unproven concepts," says Weber. Veteran franchise magnate George Naddaff concurs. He used his own money to launch the Boston Chicken franchise, among others. "My franchisees could only get money from friends and family," he says. "No big-time lenders offered financing."

Naddaff, chair of Business Expansion Capital Corp. in Newton, Massachusetts, as well as acting CEO of the 60-unit Ranch*1 franchise chain, tells his money-seeking franchisees to run ads in local newspapers to attract angels. "Just say, 'Sophisticated investors wanted. Emerging entrepreneur seeks capital to open restaurant with proven numbers.' "

Jeff Elgin, CEO of FranChoice Inc., an Eden Prairie, Minnesota, company that matches prospective franchisees with franchise opportunities, offers another route to franchise financing: "Ask the franchisor if any existing franchisees want to buy more units without managing those units." Once you identify a willing owner, propose a deal: You'll operate the unit in return for an equity position. You'll improve your chances considerably if you bring some capital and related experience to the deal.

Smaller franchisors sometimes finance part of the franchise fee if they think you'll be successful, reports Elgin, who's also a former vice president of franchising for Great Clips. At least one franchisor also offers franchisees sweat equity, while others carry contracts for a portion of equipment costs. "But such programs are seldom mentioned in disclosure documents," Elgin points out. So ask.

In Arlington, Texas, Comet 1-Hr Cleaners is building stores and leasing them to new franchisees for a charge of 30 percent of gross sales (which covers debt, rent and royalty), according to Michael Seid, founder and managing director of Michael H. Seid & Associates, a West Hartford, Connecticut-based firm that provides franchise advisory services. "Over time, the franchisee assumes total ownership of the business. Comet takes the risk," says Seid, who, with Wendy's founder Dave Thomas, co-authored Franchising for Dummies (Hungry Minds Inc.). "That's what creative financing is about. It's not dumb ideas like using credit cards or risking your family's home by getting a second mortgage to finance a start-up."

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