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5 Tips for Building an Investor-Ready Franchise Business
If you're opening a business franchise, there's a good chance you'll seek investor funding. Here are crucial considerations when building an investor-ready franchise.
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Franchises offer entrepreneurs a proven business model, product or service and marketing strategy. However, they also come with a price tag — sometimes a hefty one. First, there’s the franchise fee, which typically ranges from $25,000 to $50,000. Then franchisees must often pay contractor and professional fees, as well as costs associated with signage and inventory. As with any other business, they must raise sufficient working capital to launch and run the business.
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As a result, franchisees must always be on the lookout for funding opportunities to help with some of these costs. Because of the highly competitive nature of business funding, it pays to build a business that investors will want to work with. We’ll share five tips to help you build a franchise business that will appeal to funding sources and share information about potential lenders and investors.
How to build an investor-ready franchise
Here are a few tips to help you build an investor-friendly franchise business.
1. Cover all your legal bases.
Business lawyers are helpful when starting any new venture. However, franchises have a complex web of interactions, legal issues and potential liability concerns, making a franchise attorney essential.
A franchise attorney will help you deal with numerous legal matters, including the following:
- Selecting a business entity (e.g., a limited liability company or C corporation)
- Advising on taxation and legal rights
- Overseeing the franchise agreement
- Reviewing franchise disclosure documents
- Advising on and handling liability issues
Liability issues are a particularly crucial concern that can carry severe implications for your franchise operation — including dissuading investors. It’s not uncommon for businesses to lose millions of dollars in product liability settlements, even if the company didn’t develop the product in question. For franchisees with several units, liability issues can create a high-risk, loss-making business environment that potential investors won’t want to touch.
A franchise attorney can provide invaluable advice to help protect your business and reduce investor risk.
2. Create a solid business and marketing plan.
Buying into a franchise does not absolve you of the need for detailed, thoughtful and insightful business and marketing plans.
- Franchise business plan: Becoming a franchisee doesn’t mean you’ll simply cash checks and lounge behind an executive desk. You’ll likely be required to adhere to the franchisor’s original business model, and investors want to see your strategic vision, franchise growth goals and financial plan. They’ll want to be assured of your comprehensive business background. You’ll need a solid business plan to show how you plan to achieve profitable growth.
- Franchise marketing plan: Many franchises come with strategic marketing tools, including logos, banner designs and ad campaigns. Still, you must integrate your own marketing plan to show potential investors how your venture plans to grow customer relationships and earn repeat business. Investors want to assess your potential profitability as a franchise — your marketing plan is their map. The goal is to attract investors with your marketing.
To create robust business and marketing plans, outline concrete strategies you’ll use to grow your franchise business, such as the following:
- Email marketing campaigns
- Social media marketing
- Local marketing strategies, such as promotions that target nearby customers
Remember that your franchisor must approve your business and marketing strategies. You want to avoid branding and trademark problems at all costs.
3. Streamline your franchise’s finances.
One of the biggest turnoffs for investors is a franchisee — or any business, for that matter — whose finances don’t make sense, even if the franchisor is a well-known, profit-making brand.
“Investors aren’t looking for vague optimism; they want solid numbers with a strong track record,” cautioned Niclas Schlopsna, managing consultant and CEO of spectup, a company specializing in getting startups investor-ready. “One of our recent clients came to us with great revenue but hadn’t refined their pitch. What got investors excited was showcasing lifetime customer value versus cost per acquisition — it instantly clicked.”
Whether you own a single franchise or multiple franchise locations, impeccable accounting is essential to secure investments. Ensure you use one of the best accounting software platforms that adheres to your franchisor’s standards and syncs with other franchise-approved business software, such as a CRM solution. Your accounting and finance system should also be able to produce comprehensive financial and accounting reports, such as profit-and-loss (P&L) statements and cash flow statements — at a moment’s notice.
4. Take advantage of franchisor-sponsored training and incentives to increase overall revenue.
Franchisors are invested in their franchisees’ success and typically provide all the mentorship, training and tools needed for them to establish themselves quickly in the market and thrive.
Take advantage of all the resources and training your franchisor offers to help you develop essential skills and confidence. (And if they don’t offer robust resources, proceed with caution.) You’ll learn invaluable lessons, such as which products are the easiest to sell and which are the most profitable. This way, you can succeed quickly and maximize your revenue — and ensure potential investors take notice.
Beyond your franchisor’s resources, take the initiative to pursue training and education to better position yourself as a successful franchise owner. Read industry journals, talk to other franchisees, and grow your knowledge and skills through professional development programs.
5. Respond to changing market conditions.
Things change; just because your franchise got off to a good start doesn’t mean you can rest on your laurels. Over time, your operation may be affected by competitors, shifting consumer needs and expectations, economic changes, tech trends and more.
Keep abreast of market developments and monitor your KPIs to identify and track industry trends — whether positive or negative. This will help you recognize threats and opportunities and craft an appropriate response, such as talking to the franchisor about creating a new product.
Being able to respond to change shows that you’re paying attention and willing to do what it takes to keep the business moving forward. Investors notice that kind of mindset. It tells them you’re not just coasting — you’re actively managing a franchise that can handle whatever comes next.
Investors vs. bank loans for franchises
In general, investors tend to work with startups, while banks prefer lending to established businesses with a proven track record. Here are a few things both investors and lenders may look at before deciding to work with your franchise:
What investors look for in new franchises
Investors often evaluate a franchise’s product pitch, potential ROI and equity offer. “To stand out, emphasize how your franchise is adaptable to changing markets, and show investors how they can earn a solid return on investment while benefiting from ongoing support,” advised Joshua Seraj, founder and director of Tools420.
- Pitch: Investors want to hear your big-picture pitch. Before diving into your financials, they want to understand your market analysis and market research plan and learn how your offering solves a problem. Some of this information will be in your franchisor’s sales materials and website. However, you must add details specific to your franchise operation’s market. Investors want to see a smart, actionable plan for making your franchise successful.
- Potential ROI: Investors understandably want a significant return on their investments. They look for franchises with the potential to quickly and consistently become profitable and expand to their full capacity. One of the primary indicators of a startup’s potential is its ability to scale and grow as market demand increases. While franchise territory is usually limited to a specific geographic area, successful franchise owners can expand by acquiring franchise rights for additional, adjacent territories.
- Equity offer: Investors don’t charge interest on the money they put into a company. Instead, they expect a share of the business in return. When seeking funding, you’ll need to decide how much equity you’re willing to give up and what that share is worth. Be realistic — investors want a fair deal, but they also want to see that you’ve thought through the numbers. If your valuation is excessive or your offer is too vague, it could be a warning sign. Ensure you clearly state what investors are getting in exchange for their money and how their share will grow as your franchise does.
What banks look for when lending to franchises
When evaluating lending to a franchise, banks tend to look for proof of concept features like reliable cash flow, collateral and business experience:
- Cash flow: Banks prefer lending to established franchise businesses with steady, reliable income to minimize risk. To assess this, banks — and many of the best business loan and financing providers — will evaluate your revenue streams, P&L statements and credit history. They may also review the franchisor’s financial health and market research to evaluate your projected earnings.
- Collateral: Lenders often look for a secondary source of repayment if a business can’t generate enough capital. Some franchises require franchisees to purchase a business location, vehicles or equipment — and franchisees can apply for loans to finance these purchases. Banks may consider placing a lien on real estate, vehicles, business equipment or other valuable assets to offset their risk.
- Experience: Banks and lenders want to understand your business and whether you have the experience needed to make your venture successful. In some respects, they may view your franchise as lower risk than a completely new startup since they can assess the track record of similar franchise owners. Still, they’ll want to review your business plan and financial projections to evaluate how well you understand your specific market — and whether your past projections have been accurate.
Where to find investors for your franchise
Finding investors is relatively easy. The trick is making your franchise attractive to investors and ensuring a good investment deal. Here are a few avenues for finding business investors for your franchise.
- Online financing companies: Several companies specialize in franchise financing, including BoeFly, Swoop Funding and ApplePie Capital.
- Franchisors: Some franchisors finance part or all of the franchise startup costs in-house or through a franchise consultant to lower the barrier to entry for qualified franchise owners.
- Social media: Social media platforms are a great channel to connect with your audience, establish your brand and market your product or services. They’re also excellent resources for finding potential investors. LinkedIn, in particular, is a great place to cold pitch and network in the B2B space. But you can also use platforms, such as Facebook and X (formerly Twitter), to foster relationships and have thoughtful conversations.
- Blogging: One of the best long-term strategies for building an inbound audience is to start a blog that shares your story, outlines your goals and shows your progress. You can also seek out potential investors and read their blogs to gain insight into what they look for before investing in a young company.
Jennifer Dublino contributed to this article.
