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Its been my experience that if one were to ask an experienced franchise attorney or franchise consultant what the leading causes of franchisee failures are the responses would include that the franchisee was under capitalized. Although there are other reasons for a failed franchise ranging from an unqualified franchisee to a flawed franchise program, I'll focus on the availability of capital. Since having the necessary amount of investment capital is important so too is the source of that franchisee capital. For this reason, its important that franchisor staff confirm the amount and source of franchisee investment capital. Whether the source of funding is personal funds, stock holdings, mutual or retirement funds franchisor staff needs to confirm the accuracy of these accounts. In addition, a credit check is also important. Since the amount of Additional Funds listed in the FDD Item 7 investment table is typically for a 3 month period, its highly probable that a start-up franchisee will nedd additional capital.
When Evaluating Franchise Candidates: Follow the Money
Posted by Ed Teixeira
If a franchisor fails to confirm the amount and source of the franchisee's capital there is the probability that they will have a struggling franchisee that is depending on credit cards as their source of funding.
Posted on October 18, 2015 at 3:51 PM
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