07/10/13

Buy a Franchise or Start Your Own Business?

buy a franchise or start a business Many entrepreneurs opt for buying a franchise over starting a new business for a number of reasons. Some of them are more obvious than others, but the primary reasons are:

  1. They can start with a ready-made client base
  2. They already have brand recognition
  3. They have a parent company to train them on successful best practices
  4. They have access to marketing resources others may not

If you own or are thinking about purchasing a franchise, these may be some of the reasons for your decision. Did you also know, depending on the franchise, it might be easier to secure the financing you need to get things started? Not only does the SBA (Small Business Administration) offer small business loans targeted at franchises, they offer advice regarding SBA-approved franchises.

Franchises approved by the SBA are business opportunities that have agreements accepted by the SBA. If you purchase a franchise on the approved list, the loan process is quicker and easier. Basically, you’re looking at a franchise that is pre-approved; making the loan review less complex allowing you and the lender to focus on specific aspects of your business plan rather than whether or not the franchise is viable.

This doesn’t necessarily mean a franchise not on the list is a bad risk. There are numerous reasons any particular franchise might not be on the list. Sometime the franchise may have even decided they don’t want to be on the list. If you are thinking of purchasing a franchise that isn’t on the list, you will likely go through a little more complicated review process, but it doesn’t mean an SBA loan is out of the question. In fact, according to the SBA, “Being on or off the list is not an endorsement or indication of quality and profitability, so you should still thoroughly research for your potential franchise opportunity.”

What’s more, even if the franchise you are looking to purchase is on the list, an SBA loan isn’t a slam dunk. You’ll still need to qualify for the loan. The standard SBA Loan Application Checklist, can help you prepare the documentation you’ll need to apply. Some apply to acquiring financing for growth, while others apply to new businesses:

  1. Purpose of the loan
  2. History of the business
  3. Financial statements for three years (existing businesses)
  4. Schedule of term debts (existing businesses)
  5. Aging accounts receivable and payable (existing business)
  6. Projected opening-day balance sheet (new businesses)
  7. Lease details
  8. Amount of investment in the business by the owners(s)
  9. Projections of income, expenses and cash flow
  10. Signed personal financial statements
  11. Personal resume(s) for each of the owners and principles

There is a lot of information online about finding and operating a franchise (so we won’t go into that here), however once you’ve decided on the franchise you’d like to purchase, the SBA suggests the following next steps:

In addition to the SBA, many banks and other lenders offer financing specifically for purchasing a franchise. Make sure you do you due diligence to ensure you get the best terms and the right loan to fit your situation.

IMG_3366Small business evangelist and veteran of over 30 years in the trenches of Main Street business, Ty makes small business best practices, tips and advice accessible by weaving personal experiences, historical references and other anecdotes into relevant discussions about leading people, managing a business and what it takes to be successful. Ty writes about small business financing among other topics for Lendio.com, in addition to sharing his passion for small business every week on Forbes.com.

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About the author

Ty Kiisel
Small business evangelist and veteran of over 30 years in the trenches of Main Street business, Ty makes small business financing and trends accessible in common sense language devoid of the jargon.

Comments

  1. Ty very nice details that are needed for anybody starting a business. We started out with a franchise and then branched on our own. We feel the franchisees in our opinion do not educate the business owner on how to run a business. They only educate on the product or service they run. Therefore the business owner is starting out to fail. We should know we almost lost our house from this scenario. There us nothing wrong with owning a franchise. You just need to understand the business in detail similar to what Ty has outlined.

  2. Nice job on this post.

    Informative and I’m sure that the SBA staff appreciates your mention of their SBA Approved list.

    (Disclosure: I write about franchising for the SBA.gov Community blog)

    The Franchise King®

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