Where New Franchisors Can Find Capital

by Ed Teixeira

During current economic times, it’s often difficult for start-up franchisors to obtain investment capital. This article describes three potential sources of investment capital that can meet the capital needs of new franchisors.

There are three investment groups that can be a source of funding to new franchisors. Each of these groups has unique features. Regardless of which group you pursue be sure you have a well written business plan and executive summary. Also, the financial projections must be realistic and sound. Finally, learn about these investment groups by attending workshops and networking groups.  

Angel Investors

An angel is a high net-worth individual who invests his or her own money in start-up companies in exchange for an equity share of the businesses. Angels typically invest between $25,000 and $100,000 per transaction individually, and from $250,000 to $750,000 as a group. Angel investing represents a significantly large and growing portion of early stage capital available to startup companies.

Facts about Angels:

• Usually receive a high equity value due to early stage investments
• Due to risk, Angel investors usually seek returns of 10 times their original investment
• Total investments in 2009 were US$17.6 billion, a decrease of 8.3% over 2008.
• The total of Angel investments is larger than investments by private equity groups.
• A total of 57,225 entrepreneurial ventures received angel funding in 2009, a 3.1% increase from 2008.
• Post-seed/startup investing represented 62% of investments, an increase from 2008, indicating angels’ increased interests in the early and expansion stage.

If you’re interested in pursuing Angel Investors be prepared to bring the following attributes:

• They look for high-quality entrepreneurs with a track record of leadership and performance - either in the company's specific industry or in prior entrepreneurial ventures.
• Have a product or service that fulfills a need for a large market that will produce revenue.
• The invested funds must be used to add value to the company not to instantly reward the owners or retire debt.
• Have a competitive edge through a proprietary product or service. Investors will want to see entry barriers for your potential competitors.
• Be able to demonstrate that your company can have substantial growth and increased profits.
• Have a clearly articulated exit strategy

Small Business Investment Companies

Created by Congress in 1958 the mission of the Small Business Investment Company (SBIC) program is to improve and stimulate the national economy and growth of small businesses by supplementing the flow of private equity capital and long term loan funds. This multibillion dollar, government-sponsored group of funds invests long term capital in privately owned and managed investment firms.

Facts about SBICs:

• Administered by the Investment Division, US Small Business Administration
• An institutional LP, managing $8.1 billion in outstanding leverage and commitments
• An investor in 311 private equity partnerships
• 361, or 24% of SBIC financings went to companies less than 2 years old 1,477 companies benefited from SBIC financing SBIC financings totaled $1.8 billion
• 400 licensed SBICs in operation
• Only, companies defined as “small” (net worth is $18.0 million or less) are eligible for SBIC financing
• Most SBICs concentrate on a particular stage of investment (i.e. start-up, expansion or turnaround

For those seeking to contact a SBIC and make a presentation for funding go to the SBA website, where you can navigate to a directory of SBICs by State. Be prepared to follow the same information process outlined above for Angels.

Business Incubators

These programs are designed to assist the development of companies through an array of business support resources and services, developed and orchestrated by incubator management and offered both in the incubator and through its network of contacts. Incubators vary in the way they deliver their services, in their organizational structure, and in the types of clients they serve. Successful completion of a business incubation program increases the likelihood that a start-up company will stay in business for the long term. The BI can choose to serve select clients compared to SBDC that are required by law to offer business assistance to any company that contacts them for help.

Facts about Business Incubators

• Designed to accelerate the successful development of entrepreneurial companies
• Chapters in most major cities
• Entrepreneurs who wish to enter a business incubation program must apply for admission.
• Help with business basics
• Marketing assistance
• Help with accounting/financial management
• Access to bank loans, loan funds and guarantee programs
• Access to angel investors or venture capital

To find a BI in your area go to the National Business Incubator Association at nbia.org.

To summarize: For franchisors looking to obtain investment capital the preceding three groups focus on working with smaller companies. Take advantage of these resources and as a reminder be persistent and be willing to persevere. It can take from 6 months to a year to finally get you money.

© 2010 FranchiseKnowHow, LLC

Ed Teixeira is the President of FranchiseKnowHow, LLC. He can be reached at franchiseknowhow@gmail.com