Five Real-Life Franchise Funding Success Stories


Once a retailer, always a retailer could be aptly be called the them of Brian McDowell's life. After spending more than two decades progressing from the lowliest clerk position at Kmart at age 16 to president and co-owner of Michael's Stores Inc.'s 17-store Canadian division. McDowell began contemplating other paths. "I looked at Subway and an oil-lube place," remembers the 41-year old, who left the art-supply company when he and his partners were bought out.

During his search, McDowell ran into a friend who had purchased a collectibles franchise called Country Clutter. "It seemed like a lot of fun. You could purchase merchandise whenever and wherever you wanted as long as it fit the motif of the store," he says. He liked the idea so much, he's developing not one, but two stores simultaneously. "I arranged to get the Glendale, California, location, and while that was going on, Orange, [California,] store came up."

McDowell provided about one-third of the start-up investment, approximately $300,000 per location, himself. The remainder came in the form of an SBA-guaranteed loan.

And although he'd heard the horror stories associated with SBA loans, McDowell's experience was good. "Obtaining the loan was no more difficult than I thought it would be," he says, crediting the smoothness of his application process to his decision to use a loan broker. "She did a lot of the work and knew where to shop [the loan]."

McDowell's strong credit report and years of retailing experience were also important factors in his favor, as was Country Clutter's solid business history. McDowell eventually pledged a certificate of deposit as collateral for one store and his home for the other.

His advice to prospective franchisees? Put yourself in the banker's shoes. "What if you had $200,000 and someone wanted to borrow it? I would want to know a heck of a lot about them and how they were going to pay it back!"

Financed by an Angel

You might think finding an angel investor for your franchise would require divine intervention, but Denver entrepreneur Barney Rudden knows what it really takes is connections.

It was a formula my dad had used for a long time," says 28-year-old Rudden of the interent plus return-on-investment combination has used to entice 15 angels to invest a total of $300,000 in his first Colortyme rent-to-own franchise in 1995. "I didn't try other routes because I was just out of college and didn't have an established credit history or any of the other requirements [for a traditional loan]."

But Rudden did have a father who had been in the rent-to-own industry more than two decades. More important, his dad had friends who were willing to take a chance on a Young Turk with a college degree and six month's experience under his father's tutelage. "I also met quite a few people through my wife, who works at a mortgage brokerage in Denver," says Rudden.

After all his campaigning and presentations, Rudden had assembled a group of investors comprised of older family friends and thirty-somethings who liked the idea of backing a young entrepreneur. Acknowledging that the combination of 40 percent interest in the store coupled with guaranteed annual interest payments of 12 percent, paid monthly, was an unusual incentive, Rudden says the package had to be attractive to overcome the reluctance people might have had because of his youth.

To sweeten the pot even further for interested investors, he put interest payments in an account in their kids' names. "So 14 years down the road, their children's college tuition is paid," says Rudden. Among the other attributes of his package are a concrete exit strategy and the first right of refusal to invest in additional locations.

Although he liked the formula for his first two stores, Rudden decided to make a change when he opened his third store in Hemet, California, this past April. He scaled back to four investors and added third-party financing. "I'm changing the formula so I won't have as many investors," says Rudden, who is convinced he couldn't have opened his stores any other way. "Now I only need to raise $100,000 instead of $300,000."

Out With the Old

Why are fewer franchisees turning to traditional commercial loans for assistance? For one good reason: Obtaining a commercial loan to finance a franchise is as easy as finding the proverbial needle in a haystack. Banks are looking for a collaterized loan, and typically in a franchise, there's no real estate involved; it's a leased facility," explains Kirk Fullerton, senior vice president and manager of the SBA lending group at Dallas-based Compass Bank.

Banks want businesses to have three basic qualifications, according to Fullerton: reasonable financial strength and good personal credit of business owners, as well as quality projections. Consequently, says Fullerton, "they have a problem with a start-up on the front end." He adds that most banks are only willing to go three years on a loan without a government guarantee--bad news for franchisees, who typically look for terms of seven to 10 years.

When it comes to collateral, Fullerton says banks want a proven cash-flow stream, and even with the backing of a franchise system, there are still the issues of mismanagement and an unprofitable market.

Consequently, if you want a non-SBA loan from your local bank, be prepared to supply strong collateral that guarantees the bank repayment in case your business fails.

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