Franchise Deals Still Getting Done Despite Credit Crunch
The following is a guest post by Scott Kern, with Franchise Law Source.
Credit is tight. Prospective franchisees are finding it difficult to secure loans. Even the Small Business Administration Section 7 Guaranteed Loan is hard to come by in this environment. Despite the government’s guarantee of the largest part of the loan lenders are still holding back on financing franchise start ups.
First, are franchises being sold? And second, what are prospective franchisees doing to solve this financing problem?
The answer to the first question is yes, franchises are being sold. The number of prospective franchisees looking to work for themselves is only growing in these difficult times. Some people need to find a new way to make a living out of necessity. Thousands have been laid off. Others simply look at the way companies treat people and realize they need to take responsibility for their own destiny. Yes, franchise deals are still taking place.
The answer to the second question is that franchise buyers are finding alternative sources of finances. Bank loans are not the only way to finance a franchise business. People are borrowing more from within their own circle of influence. Your friends, family and business associates – maybe even a former employer – are surprisingly able and willing lenders. In fact, private loans can often be secured on better terms than you could get from a bank. Second, prospective franchisees are taking on partners. A limited liability company structure gives you the opportunity to bring in multiple partners, some of whom may be actively involved and some of whom may be silent investors.
Another significant change that I am seeing is that very qualified prospective franchisees are opting for lower capital investment franchises. A prospective franchisee with $300,000 to invest a year ago might have borrowed another $300,000 and opened a restaurant requiring an initial investment of $450,000-500,000, keeping a reserve for working capital and contingencies. Today that same prospective franchisee is looking at a mobile maintenance franchise with an initial investment of only, say, $200,000.
This trend of qualified franchisees taking interest in smaller franchise offerings is a boon to the franchisor that has kept its initial investment costs down.
Yes, franchises are being sold today. These deals just require more creative planning and financing than they once did.
We represent buyers in the due diligence investigation of franchise investment opportunities and review and negotiation of the franchise disclosure document and the franchise agreement. We are actually not seeing a decline in the number of deals coming through our door. The deals are just a little different than they were before.
Scott Kern practices franchise law nationwide. Mr. Kern’s franchise industry practice is a broad mix of work for franchisors. He also represents franchisees in the review and execution of franchise agreements. Before starting his own firm, Scott ran the Carvel ice cream shop franchise chain with over 400 locations. Visit www.FranchiseLawSource.com for more information.
Filed under: About Franchising, Franchise Financing
There are actually ways to tackle the financing problem faced by a franchisee. While banks comprise the biggest sector in solving this problem, there are also solutions available within the franchise industry itself. I am referring to certain franchises with acceptable system so as not to financially burden the franchisees. The franchisees can refer to the franchise guide in finding the most effective system applicable to address their needs.
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