The bar is being raised for potential franchisees and franchisors with the changes upcoming for SBA lending in May. Some of the key things to be aware of:
100% U.S. ownership required
Collateral is likely to be required for loans $50k – $350 (was not a requirement in the last few years)
Minimum 10% equity injection required (was more lenient in previous years)
The SBA (Small Business Association) registry is coming back! Only SBA approved franchises will qualify for SBA lending
For some, these new changes will eliminate SBA lending as an option (strong credit, collateral and liquidity will be mandatory). Luckily, there are several other options that can be viable as a back-up strategy:
Real Estate-Backed Loans (HELOC, etc.)
Unsecured Loans (income and credit may eliminate the need for collateral)
ROBS (Rollover for Business Startup)- the use of retirement funds without penalty.
Consult a financial expert for the option that works for you!
Any gamers out there recognize that quote? Hint: think old school video games. If you remembered that moment, you may recall what was the first step to be prepared for the dangers awaiting you once you embarked on your mission.
I’ve learned (the hard way) what it’s like to dive into franchise options without proper guidance. Now that I have a deep understanding of the pitfalls awaiting “new adventurers”, I’d like to offer a few pointers to make sure that the mission is successful for those who are ready to take the leap into business ownership.
“Why not just start my own business? Why would I pay someone else to do what I can do myself?”
This is a common perception for those new to the exploration process. Franchises are expensive, what am I getting for all that cost? The answer is pretty – simple: mitigated risk. Creating something from scratch is very time-consuming, prone to mistakes and ultimately a huge investment of time that may or may not set the business up for success. A franchise, on the other hand, is a proven business model that can be replicated. Additionally, it comes with processes, systems, support, training… for lack of a better term, it’s a “business in a box”. Once you evaluate the benefit of adopting a model with a track record of success versus embarking on your own, the value of a lower risk option such as a franchise starts to make sense. Most importantly, you may also find that not all franchises have a huge price tag!
“I can research on my own. I’ll know the right opportunity when I see it.”
When I decided to depart my 25+ career in marketing / advertising, this was my mindset as well. After almost 6 months of spinning my wheels, however, it became clear that I was in over my head. I really didn’t have a good idea of what would be a good fit for me. I thought a restaurant would be the right direction (I mean, that’s what a franchise is, right?) and I didn’t deviate from that path. I couldn’t really get good information from any of the concepts I found online and they were selling me… hard. It was overall a very unpleasant experience and it didn’t really start to come into focus until I worked with a consultant.
Why work with a franchise consultant (or why you shouldn’t go into this alone)
Looking back at the wasted time and frustration I experienced trying to navigate the limited possibilities I could find online, I realized that once I partnered with a consultant I trusted, many of my previous assumptions were incorrect. The right consultant comes with a diverse portfolio of brands across all verticals and an agnostic attitude toward which to focus on. The research was customized to my skills, qualifications and, most importantly, my goals. I was able to review and learn about a diverse range of opportunities and get real information as my consultant had already validated my qualifications (getting me past all of the screens that online inquiries put in front of you). The end result? My wife and I found the right franchise, but i also learned there was so much more I needed to learn… and there were probably others out there making the same mistakes that I could help them avoid.
I realized that once I partnered with a consultant I trusted, many of my previous assumptions were incorrect.
I’ll post more about the benefits of franchise exploration and working with a consultant, but probably the biggest point I can make for those who are remotely interested in navigating opportunities – you don’t know what you don’t know. I consider myself to be a guide and advocate for learning, not a sales person trying to push someone into the wrong business. I know it’s scary to take the leap… you don’t have to go alone (and sometimes it can be dangerous).
One of the most important pieces to your business ownership strategy is probably the least understood.
If you don’t have a funding strategy in mind or have not taken the steps toward confirming what you qualify for, your exploration of business ownership options will end before it begins. Here’s some things that might help you establish which options you may be able to use in your pursuit of independence from “Corporate America”:
Myth – SBA (Small Business Administration) Loans are restricted due to the economy and some businesses are no longer options (ie: restaurants / gyms) due to pandemic concerns.
Reality – SBA does not restrict by TYPE of business (meaning restaurants / gyms are still options) but you should verify that your preferred franchise direction is on the SBA Directory (meaning they have been validated as viable funding options).
Myth – SBA Loans are difficult to obtain
Reality – SBA loans are not as difficult as you may think, but there are some hurdles to address if you plan to pursue a 7a or Express loan (the most popular for new business investment):
Credit score- at least 640 (680+ is far more likely to be approved)
It is preferred to have another income source to ease concerns about ability to maintain payments (employed spouse / partner may need to sign on with you if you are unemployed)
You will need to contribute 15-20% of the total cost of the loan from your own resources (and usually will need to fund your franchise fee prior to being funded)
There also may be some personal guarantees involved including collateral to back up the loan, but the benefits of the longer terms and reasonable rates (prime + a variable rate) makes SBA loans one of the more popular approaches.
Myth – If I use retirement funds, I’m going to pay a huge penalty for early withdrawal
Reality – Retirement funds are a great opportunity to use your own resources to fund a business and there are programs available to convert your assets into a funding mechanism WITHOUT penalties. One of the better known options for funding a business is called a ROBS plan (Roll-Over for Business Startup). In short, the government allows a conversion of your retirement funds from their current investment strategy into another growth strategy (which would ultimately be your new business). There are some steps required where you will need some help from professionals (for example, setting up a C-Corp with a 401k plan and establishing a process by which the structure of your investment is compliant with government rules), but in short the process is a legitimate way to avoid having to take on a loan if you have enough resources.
Myth – If I can’t get an SBA loan and retirement funds are not an option, there aren’t other funding options available
Reality – Wrong! There are several options that can be viable such as unsecured or secured loans, HELOC (Home Equity Line of Credit – if you own a home with sufficient equity) and a few others (including friend and family support).
Long story short, your funding strategy should be one of the first things you determine if you want to seriously investigate franchise ownership. There are several financial strategy partners I can introduce you to in order to understand what options are best for you and address any of your questions. Knowing how you will be able to fund your dream business will make the whole process of exploration far more enjoyable (and ultimately actionable) when you are ready to move forward.
My favorite analogy for one of the early steps in the franchise discovery process is: the first meeting with a new franchise is remarkably similar to a first date. For example, which of the two am I describing below?
You are probably nervous but excited and full of questions
You are afraid to say or do the wrong thing
First impressions count and could determine how the rest of the interaction proceeds
Attitude is everything
The end result could be a “first date from Hell” or the start of a meaningful relationship
Trick question – the above applies to both.
The key recommendation that all candidates should consider when meeting a franchise for the first time: both parties have a say in whether there is a relationship possibility. It is a common misconception that the candidate is automatically going to be awarded a franchise territory (“they need me more than I need them”). In reality, it is a MUTUAL agreement for things to progress beyond the first meeting. If the franchise perceives that you may not have the right mindset or qualifications (or if you are a complete jerk – and yes, I’ve had clients that were jerks), the “first date” may be the last.
The approach I recommend – be serious, answer questions honestly (they are going to want to learn as much about you as you are about them), ask meaningful questions and be respectful. If you take away the ability to make your own decision about moving further in the process then this may not be the right path for you.
It is a MUTUAL agreement for things to progress beyond the first meeting… the “first date” may be the last.
The early stages of a franchise (or personal) introduction should be fun, interesting and potentially the start of an engaging relationship (no pun intended). Make the choice to move forward one that YOU make (not the franchise) and the overall process will be much more rewarding … whatever decision you make.
