FranchiseUpdate:

In these uncertain economic times, emerging franchise companies are finding it difficult to fund their franchise expansion strategies. Traditionally, franchise companies fund their startup and expansion in one of two ways:

1. Shoestring. Startup and expansion funds come from friends, family, home equity, and credit cards (although many of these traditional funding sources are hard to obtain these days). If all the stars align correctly, this initial capitalization bridges the gap until internally generated cash flow is able to fund future growth.

2. Institutional capital. There are two sources of institutional capital: a) loans, and b) venture or angel funding. Loans generally originate with banks. Loans often require significant collateral and personal guarantees. Institutional investors traditionally do not invest in franchise companies because they do not “get” franchising–although in recent years, this trend is changing as some institutional investors are funding more established franchise companies’ expansion strategies. Angel investors do make investments in franchise companies, but often require a significant amount of control, which some franchise entrepreneurs find objectionable.

A franchise company has two assets of intrinsic value: a) intellectual property, which constitutes the “franchise system”; and b) the geographical franchise territory. Many franchisors do not realize that the opportunity to fund their startup and expansion costs can be obtained without borrowing or selling equity by leveraging these assets. Read full article.

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