Franchise opportunities all require some up-front investment, and most have requirements for net worth or other measures intended to make sure that you have enough capital to get through the lean times as you build your business. This is for your protection as well as for theirs, but it can mean that you need financing. Bootstrapping is not an option for most franchises; you have to have a solid amount of capital, and you may need to raise some.
Sometimes it is better to use an investing partner than a bank to get the capital needed for a business. While many people think that franchising requires bank loans, there are other alternatives for financing your franchise, including investors. If you’re looking for a partnership with a specific end-point, angel investors might be right for you. With loosened regulations as part of the 2012 JOBS Act, it’s easier than before to get angel investors to join you in your franchise.
Angel investors, unlike conventional investors, invest for a payback of a certain amount at a specified time and usually also for a part ownership of equity. Depending on the relationship with the investor, this might mean a hands-on mentorship role that helps shepherd a business through or a completely hands-off approach. Angel investors can be assets to your franchise for more than just monetary needs, especially if you’re new to business management. However, it doesn’t come without its risks.
As investors, angel investors do control part of your franchise business. There can also be effects on your contract terms with your franchisor. If you’re considering a partnership or angel investor relationship, be sure to hire your own lawyer to go over everything to make sure there are protections and exit strategies in place. Ask your lawyer to go over worse-case scenarios with you, just so you understand what you’re getting into with franchisors and angel investing. Keep in mind that not all franchisors will work with franchisees who have angel investors; some require capital to come from conventional small business loans or the franchisee.
Now how do you find that angel?
The most important thing angel investors look for in a future business are the people who are involved in it. If you’re planning on running the business yourself without the help of a manager, you’ll need to show angel investors that you are ready and capable of taking on the role. If you’re creating a team of workers and have certain people in mind for managerial roles already, angel investors will want to know how well you work together and how the team will help create a successful business under your leadership. Franchisors often look for the same thing in their potential franchisees.
Angel investors also look for smart investments. While no investment is without risk, investors always look for opportunities that will make profits. Franchisors look for the same thing, too. Showing your worth is important to investors and franchisors—why can you succeed where others can’t? Doing your homework on opportunities for success and what it requires is important to pitch to your audience well and gain the respect and monetary backing of investors.
Even if you’re not looking for an angel investor, taking this approach to the franchise search can help you sign on with a franchise that will be a good fit and supportive of your business goals.
This article was originally published by America’s Best Franchises
Published: January 20, 2014