Funding

[seemore]

Hi all. This may be a rediculous question but I certainly feel there is a way for me. I am looking at a Franchis and found out about financing today. They want for me to have $75k Initial Investment Assets and the remaining $350-$400K would be needed through someone like the SBA. THe problem is I am 28 with 3 kids and 1 on the way and I currently am the sole source for income. I do make good money and this business will be primarily for my wife. The issue i have is that we do not have any cash flow, recently started 401k, and no equity in our 1.5 year old house. How can I get the initial $75k? Can i take a loan from a local bank for this? Any suggestions or ideas would be appreciated.

[akula]

Welcome, your current financial statements indicate that you can't afford the entry costs for this business opportunity. Your alternatives are either to accumulate more savings or to change opportunities. I really doubt that a $500k franchise is an appropriate investment for a mother with 4 young children, who may not have ever owned a business herself previously, so i would consider the option of picking a different opportunity....there are things you can do to help you accumulate the $75k as quickly as possible (such as starting to run a family budget, getting a second job etc), but i would question the logic of doing these things, for the aforementioned reason.

anyways, in case you're thinking "damn it, i just wanna know how to get the $75k!!", the answer is "set a budget, identify how much money you can save, set a time goal, start working more, cut you expenses, consolidate your debt, lower your taxes, save more money than you do now, invest the savings in a better product, borrow some from family/friends, ask your wife to start working so she can start putting away savings as well, ask her family for some help and within a year you'll have your $75k, negotiate a lower fee with the franchisor, or ask them for financial assistance, and you'll be on your way"

[Silverion]

I completely agree with Akula. I am very surpised you would even be asking this. Financially speaking what you are proposing makes no sense at all and specially in this times where your finances are your safety.

However if you would like to look for alternatives I would recommend you to see if your wife has any friends that would be interested in partnering with her in order to divide the initial costs of the franchise as well as the responsabilities involved in managing the business. Considering the growth of your family and the responsabilities involved, this might be the best option.

But I strongly reccomend you to avoid getting into debt to please a caprice. The financial, familiar and environmental (economically speaking) conditions right now are (based on your description) not at all fit for you to invest or borrow such a large amount of money. On the contrary, start saving.

[seemore]

I appreciate and respect both of your responses. I understand that financially this is not ideal but the purpose of getting into the business is to make money as a second income. I personally feel that this franchise is an ideal near opportunity due to the timing of the season (location i am in and the business) but will see what happens with the budgeting. Again i appreciate the feedback and think that negotiating the start up costs is a great idea. I do have a few business partners in mind and will also consider that.

[akula]

seemore, i'm glad you're willing to explore your options because you have two other alternatives which can solve your problem. to make my point, let me use an example of a starbucks franchise to show a difference in buying a greenfields franchise and an operational franchise.

when you contact starbucks to buy a greenfields franchise, they'll screen you by quoting a dollar amount that's required of all new franchisees, as well as quoting a dollar amount that you'll need to set up the new store. this second dollar amount is usually lent by the franchisor whereas the first has to be financed by the franchisees. the situation is different when you want to buy an operating starbucks shop, either from the company, or from another starbucks franchisee who wants an exit. in these circumstances, because the shop has existing assets and cashflow, you can sometimes do an LBO with no money down. In your case it means this;

1. You can ask your franchisor about buying one of their company owned stores (if they have any). If they say that's possible, you can then approach the bank and borrow the full purchase price using the shop's assets and cashflow as collateral (something you can't do with a greenfields franchise). Or, if possible, rather than going to the bank, you can try to get full vendor finance, or even a partial MBO (i.e. buy the store in partnership with the store's current management). Alternatively,

2. You can ask the franchisor for their list of franchisee, and then approach the franchisees with a buyout offer. If that's possible, you can then approach the bank and borrow the full purchase price using the shop's assets and cashflow as collateral (something you can't do with a greenfields franchise). Or, if possible, rather than going to the bank, you can try to get full vendor finance, or even a partial MBO (i.e. buy the store in partnership with the store's current management).

overall: in addition to your first option of trying to finance the purchase of a greenfields franchise, you can explore the other two options of buying an operational franchise either from the company, or from one of it's franchisees, because when it comes to buying operational franchises, the loan process is easier, allowing you to either access vendor finance, or complete an LBO/MBO

do you understand where i'm coming from?

[seemore]

Akula,

Makes perfectly good sense and i do understand. The struggle i have with those suggestions is the location i have in mind. I am in a newly developed area that has a brand new plaza opening up with a large grocer as the main attraction so ideally i want to be the first of this kind of business. The closest is about 3 miles away but not a franchise and feel the demographics are good for what i want to do. Of course i want professional or what the franchisor offers for demographics to back up my theory. If things worked out with my newly built operation, i would like to expand by buying others with teh same name, but may need to do what it takes. I am just trying to beat the rush for thsi location as i think it would be profitable and and ideal location. I actually mentioned to the franshisor about signing an NDA to ensure they do not go ahead and open the location themselves. Thanks again, and please keep your thoughts coming. .....

[akula]

no worries well, whilst i'm not in the best position to comment on the opportunity selection that's happening here, i'm obviously available to brainstorm your financing options. so, i guess there's some other alternatives available, particularly if you're in a newly developed rural area. for example, if you're looking to create employment and training in a place suffering depopulation or unemployment, your local government and philanthropic organisations might have grant programs, which can help you cover your $75k...at least that's the case in rural Australia...i'm sure there's also other ways which escape me at the moment.

p.s. the facts here are probably better suited for a non compete agreement in addition to an nda