How to best navigate buying a franchised business

Buying into a franchised business is one of the easiest ways to enter the world of business ownership. Much of the groundwork has already been laid, with the necessary work of determining branding, services, and marketing already completed for you. However, franchising can also be an expensive endeavor. This is where franchise financing can help ease the process get your doors open quickly.

What is franchising?

Franchising is the process of buying marketing and service rights from an existing company, often times a large entity, like McDonalds or Chick-fil-a. Doing this provides a business owner with access to marketing materials, products, and a built-in brand identity. The franchisee is typically responsible for financing the location, materials, equipment, employees pay, and other expenses, as well as paying a franchising fee to the original corporate owners.

This may seem expensive, but it is often worth it to have the groundwork of establishing a corporate identity, and services, has already been done, saving the new owner time, money, and hassle. Because these time taxing activities have already been completed, the owner can focus exclusively on those activities that create profit.  

How can Franchise Financing help?

Franchise financing helps provide the initial startup cost for a new owner.

Different lenders will have different requirements for their financing. While one lender might be ok with using funds for the initial franchising fee, others might not. And each group will have their own interest rates and payment plans.

There are several sources who offer franchise financing. Commercial banks are some of the most commons lenders. With SBA loans the Small Business Administration helps ensure the loans and can help determine the best solution for each franchise needs. Some private lenders may also offer franchise financing, and some franchisors like UPS or Golds Gym offer franchise funding as well.  However, these private lenders often have strict requirements and it is best to talk to your broker about if these options are a good choice for you.  

How to ensure that franchise funding works for you?

As with any business creation, franchising still has risks.  But there are some things you can do to help ensure success. Keep a business plan ready to ensure that your business keeps on track.  The budget for both expected and unexpected expenses.  Understand what type of licensing agreement the franchisor offers. Is it a one-time payment, or do they require yearly payments? And how will your loan be able to help with these fees, if at all?

Finally, some franchisors will want to see preexisting income or have a requirement for where the real estate for the purchase is located. These can create additional expenses which must be factored into the business plan. For example, Chick-fil-A only requires $10,000 for a startup fee, and will pay for all required costs, as well as leasing equipment, but require 50% of the pretax income from the location. This has a major impact on profits and how long it will take to pay off your loan. These details are critical for building a business plan and ensuring your company success.

Franchising has a lot of benefits, but it also has a lot of requirements. Our franchise financing can help you navigate this difficult path. To learn more about how our franchise loans work, and to understand what the best solution is for your business, contact us today.

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