by Marshall Reddy
Business buyers, whether they’re experienced owners or purchasing their first company, love franchises. And for good reason. Acquiring a franchise means you have a greater chance of being successful more quickly. You’re buying into a proven business model that works across geographic and demographic lines, a recognized brand with corporate marketing support, a well-defined audience and product offerings, and clear operational guidelines and business goals.
Franchisors screen potential buyers carefully, both for fit and for financial viability, and provide transparency in the application process so there are very few unknowns on either side of the purchase. All those factors go a long way toward mitigating risk for a new owner.
That’s why lenders love franchises, too. Most lenders are very willing to pre-qualify a buyer for a franchise loan, which gives both the buyer and seller confidence that the deal has a high probability of closing cleanly and quickly. The SBA’s 7(a) loan program is the flagship product for general financing. Franchise owners can use this loan for purchasing real estate, fixed assets, working capital and even refinancing existing debts. With amounts available up to $5 million, business owners can use it as a loan to buy a franchise and cover initial startup costs.
If you’ve considered starting or buying a business but don’t want to take on loan debt, there may be another solution: using your own 401(k) or IRA as a source of funding. I’ve written before about the ROBS (Rollover as Business Start-Ups) program. The program was designed in cooperation with the IRS to allow workers to leverage the funds they’ve invested over the years and use them to build, buy, or grow their own business.
The ROBS program now has a proven track record lasting almost thirty years. The program has helped thousands of entrepreneurs receive funding in a way that is safe, effective, and legal. It’s also quick – many receive their funding in as little as 10 business days.
Experienced franchise owners who are expanding their holdings may also qualify for better terms from lenders. Because they have a proven track record and represent much less risk than the typical business startup, lenders may offer to forgo requirements for collateral or offer terms as low as zero down.
Franchisors may offer financing directly through the parent company, but more commonly, they partner with preferred lenders who administer the loans. These lenders understand the industry, the business model, and the process for applying to own a franchise, which shortens the learning curve (and loan approval time) considerably.
Preferred lending arrangements provide partner banks deep historical insights into the franchisor’s model and success rate, and an understanding of franchisees’ needs and performance metrics. By partnering with a franchisor and documenting most of the risk factors up front, banks can quickly and effectively get through the underwriting process and make better and more timely decisions.
The health of the franchise brand may also help the chances of getting a loan. If a brand is strong and growing, lenders are willing to take risks on borrowers they may have passed over for a conventional business loan. A brand that’s in decline, conversely, may hurt a borrower’s chances of getting funding, no matter how strong their personal financial position.
Whatthefranchise is a Strategic franchise consulting firm that has helped people for over 30 years to find the best franchise via proprietary assessment tools.
Marshall’s background includes over 41 years of business ownership, sales, marketing, and consulting experience. His first endeavor as an entrepreneur was as an independent contractor for the southeastern United States, with the Optyl International Eyewear company based in Austria. During his tenure with Optyl, he was awarded the Consultant of the Year for the United States. Marshall parlayed his success with Optyl into a successful partnership of optical retail superstores in Jacksonville. His company also worked as an outside consultant for Vistakon, a Johnson & Johnson company.