From an entry standpoint, a franchise is one of the easiest ways to open a small business. The products, business model, and aesthetics are already established by the parent corporation the heavy lifting that comes with establishing a business identity is skipped. However, franchises have their own requirements, significant ongoing costs, and may not be perfect for everyone. Determining if a franchise is right for a client is important in determining which type of funding is the right choice for them.
When is a franchise a good choice:
A franchise is a good choice if the owner has an idea of the type of company they want to open, but doesn’t have the time or expertise to start in that industry. For example, someone with an interest in coffee, but without the connections to start their own coffee house, could look at Duncan Donuts for their established names and products. This would provide them with the recipes, supplies, and marketing material that they would need to get off the ground. Many corporations might also have requirements for physical location, which can help to establish if the finance will need to look for real estate loans.
Because corporate support is an integral part of franchises, they are also perfect for people who don’t have the capability to handle all the other aspects of establishing a business but do have the capital. This makes them perfect for a person who is already successful in business and is looking to expand their holdings.
When is a franchise a bad choice:
A franchise can be a bad choice when the initial cost is too high. Many corporations have a high entry cost for their franchises. Places like McDonald’s or Subway charge a lot up front to license the name and subsidiary material. They will also often control where a franchise is established, making them a difficult option for entrepreneurs in certain geographic locations.
These difficulties can also apply to franchises with a low entry cost, but high repayment. For example, Chick-fil-a has a low entry cost but requires 50% of all profits from the stores. These payments sit on top of real estate costs, material costs, employee costs, and so on. They also only select a few franchise applicants a year, limiting the probability of being selected.
The other major issue is creative control. If a person wants to have total control of the business a franchise is a bad choice. Because franchises have strict rules and regulations the owner must follow, it is difficult to make them unique. That means that having grandma’s recipe for apple pie at Denny’s is a big no-no.
Finally, franchises are a bad choice if the business can survive without the name recognition. In bigger cities, it is possible to rent retail space and to establish a business without a big supporting name. Doing so eliminates the previous issues, and allows the owner to make their company their own. Costs for materials, supplies, and bills may be higher, but the benefits may be equal. In this scenario, a borrower will need to look at real estate loans, equipment loans, and possibly even hard money loans in order to gain the initial capital needed for a new company.
Proper training is essential for brokers who want to include franchise funding. Understanding how lenders expect to work with a potential franchisee and how to find the capital to open a franchise is important. Our training can help in understanding the different types of loans and requirement that will be needed.