You've read the literature, done your due diligence considered the statistics on success, and know a franchise is the way you want to get into business.
But before you sign on the dotted line, answer this question first: Where will you get the money to finance the franchise and royalty fees, inventory and working capital?
We asked five franchisees across the nation how they financed their businesses and came up with some traditional as well as some distinctive solutions to this often problematic issue.
Franchising seems to be infectious, at least for 40-year-old Douglas York. After spending several years as a contractor whose assignments included constructing a number of stores for franchisors nationwide, he decided to get involved in the finished product. Joining forces with his wife, Frances, a licensed cosmetologist, York purchased a Great Clips franchise in Jacksonville, Florida.
"When we got into Great Clips, you could do three stores in two years [as a discount package]," says York, who opened the allotted stores in June 1998, December 1998 and this April, surpassing his commitment with a fourth location in July.
The father of three had to come up with $120,000 for each location and decided to go with the nonbank lender his franchisor recommended. "Textron Financial gave us a loan based strictly on equipment without a ton of paperwork," explains York. "I did talk to banks, but they couldn't offer anything better than Textron, and with Textron, I didn't have to put up my house [as collateral]."
To open his first store, York secured $60,000 from Textron by submitting two years-worth of tax returns and his personal savings to complete the $120,000 investment. "You shouldn't finance yourself to the hilt," York says. "You have to leave yourself a little room to maneuver."
Friends, family and your own resources are typically your first options when it comes to financing a business. This was particularly true for Paula Bush and Christina Domecq.
Domecq, who started her New Horizons Computer Learning Center in White Plains, New York, in May 1998, now employs 35 people and projects $2.3 million in sales for this year.
To achieve this high level of success, the 22-year-old entrepreneur had to first tap the family coffers for the $500,000 start-up cash the franchisor required.
"I tried to get an SBA loan, and they flat out told me no because I was too young and didn't own a house," says Domecq, who began honing her entrepreneurial skills at age 16 while working for her father's wine and spirits distribution company.
In addition to the SBA, Domecq approached banks and even a loan broker, with similar results. So she turned to her family: an aunt, a grandmother and her dad. "They loaned me the money, and I'm paying them back with interest at the prime rate," says Domecq.
But Domecq admits convincing her father to ante up was no easy task. His major concerns? "I was young, and I wan't a business major in college," she says. What finally convinced him was Domecq's carefully researched, 120-page business plan and the savvy management team she had assembled.
Instead of accepting her family's money on a handshake arrangement, Domecq got a lawyer to create loan papers for each relative. "That's not because my family isn't close," explains Domecq. It was simply to keep the transaction professional.
Paula Bush also went to a relative for the money she needed to start her Pressed4Time dry cleaning and shoe repair pick-up and delivery franchise. Unlike Domecq, however, Bush doesn't have to repay her mother the $12,000 she borrowed. But that doesn't mean she went to the "Bank of Mom" unprepared. "My mother has always been my mentor and friend, and when I decided to go into business for myself in 1997, she was supportive both emotionally and financially," says the Methuen, Massachusetts entrepreneur.
Bush explained to her mother what she wanted to do and showed her her business plan. "She was never concerned about being repaid but asked questions about how I was going to be paid by the customers. I could easily answer her questions, because I had asked the same questions myself before I made the decision to invest." In addition to showing her mother a business plan, Bush also had to check the laws governing how much money her mom could give her as a gift without paying a penalty.
Bush's gamble paid off: The 54-year-old former sales rep was able to start drawing a salary in only her third month in business and is currently generating sales of $12,000 a month.