Patience is a virtue, but when it comes to franchising, it can also be a mistake.
That’s the message I have for some franchise candidates when they are missing the opportunity to launch their own franchise empire but are being too cautious by considering only one unit. While in many circumstances beginning a franchising journey with one franchise absolutely is the smartest bet, many franchise systems are better suited for people to take the plunge as a multi-unit franchisee or area developer.
If you read my articles regularly, you know that I don’t often share the names of franchise systems that I represent. In general, I think franchise candidates should learn a bit about themselves and determine what they are looking for from a franchise system, then see which of those franchises matches up well with their skills and goals.
Franchise business ownership is an exciting way to live your life goals and dreams, but too often, aspiring franchisees fail to even make that first phone call because of one major concern:
How can I afford my own franchise business?
It’s no surprise that money is usually at the top of people’s lists of reasons not to pursue their entrepreneurial dreams. What is surprising is how often people assume they don’t have the means to launch their own franchise without knowing all of their options.
With the help of my friend Steve Nilssen at Guidant Financial, we put together a list of some of the most popular ways that franchise candidates can finance a franchise.
Rollover for Business Startup – This is the most popular way for people to finance a franchise. Instead of taking out a loan, they finance the franchise themselves using money they’ve saved in their 401(k). Essentially, a new business is established as a C Corporation. That C Corp creates a new 401(k) plan that can purchase private stock. Funds from the candidate’s 401(k) are “rolled” into the new 401(k) plan without triggering a taxable distribution. The 401(k) plan can then purchase stock in the C Corp, otherwise known as your new franchise. The funds used to purchase the stock are used to acquire or start your new cash-rich and debt-free business!
This works not only with a 401(k), but also a traditional IRA, 403(b), Keogh, SEP or TSP. Just be sure to use a professional to set up a Rollover for Business Startup so as not to miss a step and trigger a taxable distribution that could cost you thousands of dollars!
Small Business Administration (SBA) Loans – While these used to be far more labor intensive to secure, the SBA has recently taken steps to make it much easier for franchise candidates to acquire funds in order to purchase a franchise. Effective January 1, 2018, franchise businesses can become pre-approved for financing from the SBA. That means a franchise candidate no longer has to prove the viability of the franchise business they are hoping to purchase if the franchise is on the pre-approved list. It doesn’t relieve the burden of the candidate to personally show worthiness for the loan, but no longer needing to prove the worthiness of the business as well drastically reduces the burden on the candidate.
Nilssen reports that 45 percent of their clients use a combination of an SBA loan and Rollover to Business Startup in order to finance their franchise businesses, so there’s a good chance that those two methods of financing will help you launch your small business. However, there are a few other ways to secure financing worth mentioning.
Portfolio Loans – This allows candidates to borrow up to 80 percent of the value of their stocks, bonds and mutual funds. Unlike traditional loans, this type of loan is brokered out as an interest-only loan, currently set around 4 percent. There are no upfront costs and loans like this generally close within 10 days. Just keep in mind that the loan broker has collateralized your portfolio, so you can’t withdraw the funds or fall below the 80 percent loan-to-value ratio.
Cash-out Refinance – This is a way to collateralize the value of your home by refinancing your mortgage for more than the current outstanding balance, then keeping the difference between the old and new loans. For example, let’s say you owned a home valued at $300,000 but still owed $100,000. If you needed $100,000 to launch your franchise business, you could refinance your mortgage at $200,000 and use the extra $100,000 for your business. This model is a great way to improve your debt profile and secure a more stable rate, but the cash-out rate will likely be a bit higher.
If you’d like to know more about your financing options, please give me a call at 919.846.7111 or email@example.com.
The current economic boom has seen unemployment rates plummet to levels not seen in decades, but that doesn’t mean those currently unemployed should only focus on finding a new job. Unemployment is scary, but when considering a new life as an entrepreneur, it can also be exciting.
Not sure which path you want to take? You may be right for a franchise.
Here’s why. Continue reading
Spring has arrived in many parts of the country and is coming quickly to others. It’s the annual period of renewal, making it an exceptional time to jettison the old and usher in the new. For people considering saying goodbye to life as an employee and hello to a new chapter as a small-business owner, now is a great time to consider a franchise business.
The annual International Franchise Association (IFA) Convention recently concluded in Phoenix, Arizona. The city, the venue and the attendees were different than they were in years past, but the outlook for the franchising world remains the same.
It’s going to be another very good year.
Forbes Coaches Council Is an Invitation-Only Community for Leading Business and Career Coaches[Raleigh, NC (February 1)] — Jim Judy, one of the country’s leading experts in franchise businesses, has been accepted into the Forbes Coaches Council, an invitation-only community for leading business and career coaches.
Jim Judy joins other Forbes Coaches Council members, who are hand-selected, to become part of a curated network of successful peers and get access to a variety of exclusive benefits and resources, including the opportunity to submit thought leadership articles and short tips on industry-related topics for publishing on Forbes.com. Continue reading
As a franchise consultant, I get this question regularly from candidates trying to decide if they should explore entrepreneurship through franchising or try opening an independent business. Traditionally, franchises have been considered safer bets than startups because franchise businesses offer unmatched levels of support along with proven business models of success.
However, do a search of success rates for franchise business vs. independent startups and you’ll get a wide range of answers, none of which can be considered conclusive. However, a recent study posted on entrepreneur.com revealing why small businesses generally fail confirms what I’ve believed all along:
Take a good look at your life right now. Odds are, it’s going to look very different in a decade. Change will come for everyone, but preparing for change is what separates those who create the life they want and those who exist in whatever life creates for them.
Which person will you be?
Kevin Brauer of St. Louis, Missouri, for over two decades spent 110 nights per year on the road as a sales manager for various corporations. In 2013, he decided he’d had enough. His sons were growing up without having their father around. He was ready to be home more often, take greater control of his life and explore the possibility of small business ownership.