Joining a franchise is one of the best ways for young entrepreneurs to become a franchise owner. This enables them to get off to a fast start with an established market, product, and procedure and avoid a high learning path.
Franchisees typically benefit from the franchisor's ready-made, tried-and-tested business model, which frequently includes a well-known brand, marketing strategy, and benefits associated with economies of scale when purchasing supplies and other key business inputs.
That package of delights, on the other hand, does not come cheap - often a large one, depending on the franchise brand you wish to identify with.
In addition to the franchise fee, which normally runs between $20,000 and $50,000, franchisees are also required to pay contractor and professional fees, as well as expenditures related with signage and merchandise.
They must raise adequate working capital to establish the business and keep it functioning until it breaks even, just like any other business.
Franchisees must constantly explore for funding alternatives to assist with some of these expenditures.
Because business finance is so competitive, it pays to establish a company that will not only win loan approvals from banks and other traditional lenders, but will also attract independent insurance franchise investors, such as private equity firms, who may have more favorable lending terms.
How to Create a Profitable Franchise
Here are a few pointers to assist you in developing an investor-friendly franchise firm.
1. Cover all your legal bases.
When seeking investors for your franchise, keep in mind that you'll be introducing another independent organization, the investor, into an already intricate web of connections.
To ensure that everything runs well, it's critical to get a franchise attorney right once, who can assist with things like the franchise agreement, the franchise exposure form, and liability issues, which can have major consequences for franchise businesses.
Potential investors may be put off by liability concerns in a partnership. This investigation, for example, discovered that corporations frequently lose millions of dollars in product liability settlements, with strange sums like $3.5 million in settlements being reported.
This occurs even when the company in the litigation was not engaged in the development of the product in question.
For franchisees with multiple units, such liability risks can create a loss-making, highly flammable business environment that potential investors will avoid.
2. Create a solid business and marketing plan.
One widespread misperception among entrepreneurs considering a franchise is that their function as a franchisee will be confined to writing checks and sitting behind an executive office desk.
While the franchisor will frequently require the franchisee to adhere to the original business model, no investor will come on board unless you have a business plan that details the strategic vision and goals for your franchise business, financial projections, and a thorough background of the business.
Further, even though the franchisor will have a marketing strategy in place, replete with logos, banner designs, and ad campaigns, it is critical that you build and integrate your own marketing strategy with the franchisor's marketing plan.
Potential investors will frequently want to see how your business intends to communicate with potential clients, as this will considerably affect how they evaluate the profitability of your endeavor.
To that end, invest in every practical marketing tool that a typical business will use to find and close leads.
Marketing strategies such as email and social media marketing can be quite effective for franchisee operators just starting out, thanks to the 58% of potential leads who check their emails every morning.
To add to this pool of potential leads, you can use localized ad campaigns and promotion programs that target customers around your area of operation, ensuring your franchisor approves each element of your marketing strategy to avoid trademark and branding issues later on.
Invest in every useful marketing instrument that a typical organization will utilize to find and close leads.
Because 58% of potential leads check their emails every morning, marketing tactics such as email and social media marketing can be highly beneficial for franchisee operators just starting out.
3. Streamline your franchisee’s finances
A franchisee or any firm, for that matter - whose finances don't make sense, even if the franchisor is a well-known, profit-making brand, is one of the biggest turnoffs for investors.
While it is common for single franchisee units to use basic accounting systems in the office, franchisees with multiple business units may find it difficult to manage finances through simple financial software, a situation that frequently makes the business look bad in the eyes of potential investors.
To address this issue, implement a solid accounting system that connects to all of your company divisions, ensuring that any new software or hardware you introduce fits the requirements set by the franchisor, if any.
Your system should be able to provide complete financial and accounting reports at any of your franchise locations at any time.
Furthermore, be highly selective in your bank partner, ensuring that it understands your business as a franchisee and your ambitions to bring on an investor.
A good bank will develop alongside you by providing financial guidance and support while remaining neutral in the relationship between your franchisee and your investors.
Investors vs. bank loans for franchises
The primary distinction between an investor and a lender is that investors want to lend money to new companies, whereas banks prefer to lend money to established organizations.
Before collaborating with your company, investors and bank lenders will look at the following factors:
What investors look for in startups
1. Your sales pitch: Investors want to know what your big picture pitch is first and foremost. Investors want to understand your market analysis and how your goods or services solve a problem before going into your financials.
In other words, an investor wants to see a detailed plan for bringing your vision to life.
2. Your capability: More than anything, investors want a high rate of return on their assets. As a result, they aim to invest in companies that they believe have the potential to become the next great publicly traded corporation.
The ability of a firm to expand and grow as market demand increases is a key measure of its potential.
3. Your equity proposal: Finally, investors do not charge interest on funds invested in a company. Instead, they seek a stake in the company's equity.
What banks look for in small businesses
1. Your financial situation. To reduce their risk, banks prefer providing money to established enterprises with consistent, reliable income. Banks and other financiers will look at your revenue streams, profit and loss records, and credit history to see if you have enough money after expenses to repay the loan.
2. This is your proof of ownership. Furthermore, lenders frequently look for a supplementary source of repayment if a corporation is unable to generate adequate money. To reduce their risk, banks will consider real estate, vehicles, commercial equipment, or other valuable assets.
3. Your knowledge. Finally, banks and lenders want to know about your business and whether you have enough experience to ensure its success.
They will also review your company plan and financial projections to determine how well you understand the market and whether your previous projections have been correct.
Where to find investors
Finding investors is quite simple nowadays. The key is to make your startup or small firm appealing to investors.
Here are a few areas to look for investors for your business:
1. Platforms for online fundraising. Online fundraising platforms have expanded in popularity over the last decade, and many accredited individual investors use them to uncover promising startups.
AngelList, SeedInvest, StartEngine, and Wefunder are a few popular equity crowdfunding websites.
2. Social networking sites. Social media platforms are a terrific way to connect with your audience, create your brand, and advertise your product or service, but they are also a great way to identify possible investors.
LinkedIn, in example, is a terrific location to cold pitch or create strong connections, but platforms like Facebook and Twitter may also be used to foster relationships and conduct serious dialogues.
3. Blogging. Starting a blog that tells your narrative, specifies your goals, and displays your progress is one of the best long-term tactics for developing an inbound following.
You can also find potential investors and read their blogs to get an idea of what they look for while investing in a franchise business firm.
