Starting a new business can be a daunting prospect. Franchising is a potential option for individuals or groups who want to own a business but are not interested in starting a company or concept from scratch.
Some of the most common examples for franchising are fast food restaurants. Go to a location representing any major chain across the country and the product, atmosphere and experience is largely the same, even if the ownership is not. Thanks to years of practice, the fast-food industry’s business model, in general, is replicable, and the brands are among the best known in the world.
Nonetheless, knowing a brand name or being a regular customer of a business is not an indicator of franchising success. A franchisee must understand the nuances of the respective industry and the broader obligations of owning a business. In fast food, for example, there is a rapid pace, high employee turnover, equipment maintenance and health codes to uphold.
From restaurants to gyms and hair salons, all industries contain such unique characteristics. It’s contingent on a franchisee to understand what is within their skillset to manage, especially if the sector is new to them.
While owning a franchise or set of franchises can be a lucrative career path, there are usually up-front costs. Depending on the market, type of business, real estate needs and the brand itself, startup fees and costs can be in the upper six figures and higher. There may be an available capital requirement that can price out a potential franchisee, and even after the business is up and running, regular royalty fees are paid to the franchisor for the right to continue using the brand and to receive training and support.
There are several options to mitigate startup costs, including short and long-term financing, equipment financing and Small Business Administration (SBA) loans. The latter may offer more flexible terms, lower down payments, and loan guarantees by the SBA.
Given a franchise is primarily an extension of a specific and, in many cases, well-known brand, there can be strict rules for operations. Operational processes may be rigid, there can be required documentation, unexpected costs to update equipment can fall on the owner, and there are likely limitations on marketing. For an owner who revels in creativity and chafes under restrictions, owning a franchise may not be the right decision.
Considering the myriad factors that swirl around opening a franchise, it is reasonable to seek professional assistance. An experienced business banker can assist with identifying and securing the right financing solution, while an attorney may be able to help parse contract documents to ensure a franchisee is clear on rules, fees, and the specifics of the deal. With such guidance — and solid answers to previous questions — the process of opening a new franchise will go much smoother.
** SBA LOANS AND FRANCHISES**
The Small Business Administration’s (SBA) financing solutions are powerful vehicles to get new owners on their feet, providing working capital and assistance for startup costs. Yet, there are certain rules when buying a franchise to qualify for SBA funding.
The chief consideration is whether the franchisor’s business is listed on the SBA’s franchise directory, found on the agency’s website at sba.gov. If the business is not on the list, the franchisee may not be eligible for financing. The list is updated frequently, so it’s possible a new franchisor hasn’t applied or been approved to the list yet.
The nature of the franchise concept can also impact the terms of an SBA loan — how established the concept is, whether an owner is acquiring an existing location, etc. An FNB Business Development Officer can assist with the process and develop loan options to meet a franchisee’s unique situation and needs.
Visit fnb-online.com/franchise-lending to learn more.
