Financing Your Growth

Financing Growth

Here are three ways for a franchise to finance its growth plans.

Which will work best for you?

By Cramer Soebbing

Establishing cash flow is a main objective for franchisees. When an established franchisee is looking to expand their business and, in turn, their cash flow, inevitably the main question becomes: What is the best way to finance my growth plans? Whether owners look to grow their businesses through unit expansion, equipment updates or unit remodels, there are three principal means for franchisees to fund their growth:

        1. Securing debt financing from an institution;

       2. Retaining the cash flow and profits of the business in the company; or

       3. Sourcing additional equity investment from the owners and/or other investors.

    

Debt Financing

The most common means of funding growth for franchisees is by seeking outside capital in the form of debt financing. All-time-low interest rates have significantly lowered the cost of borrowing, making this manner of funding even more attractive in recent years.

In my experience, working with a local financial institution, such as a local bank or credit union, has been the preferred means of sourcing this funding. Strong community relationships are valuable in bridging gaps that national lenders might overlook. Some business service providers also cater to franchisees in not only helping them source funding, but also in partnering on strategy to make sure owners are maximizing their capital.

However, as of lately, many online lenders have come to the market to disrupt the traditional structure of commercial lending. These new companies view the traditional lending process as cumbersome and have sought to differentiate themselves through innovative products and competitive pricing. They use technology to make the process more efficient by eliminating paperwork and striving to get funds to borrowers faster.

Franchise-focused lenders have already emerged in this new market segment of the commercial lending industry. These lenders have teams that work specifically with franchise owners on their growth plans to understand goals and help identify the correct products. Some franchise model companies also have longstanding relationships with major bank partners, who have created exclusive lending programs. Whether choosing a local partner or an online alternative, it is important for franchisees to weigh their options and each of their intricacies when looking at debt financing.

Retaining Cash Flow/Profits

Franchisees in a position where retained earnings from business operations alone can fund growth have the largest variety of financing options available to them. These are typically well-established business owners and attractive prospects for commercial lenders. Although many business owners in this position would prefer not to involve a financial institution, it is critical they consider the advantages of this funding.

Typically when looking at personal net worth, by far the largest portion of a business owner’s net worth is tied to their company. In that consideration, it sometimes makes sense to diversify cash flow away from the business into other investments. Owners should work with their business advisors to look at factors such as their internal return on invested capital and compare that to the expected cost of that capital along with other metrics. That should be compared to investment opportunities outside of their business, and should also tie into the owner’s personal financial goals. Then that individual can make the most informed decision as to what is the best use of their own capital.

Additional Equity Investment

Business-owners typically do not want to give up equity in their businesses unless they are looking to completely sell and walk away. Also, due to franchise contracts, bringing in outside investors can become a cumbersome process, if allowed at all. We find this to be the least utilized source of growth funding in our experience, and usually for good reason.

Franchisees have much to consider when it comes to how to fund the growth opportunities available to them. The good news is there is an abundance of resources available to help in the process. It is critical to work with your partners and advisors to determine the ramifications of each potential financing source. It is also important to consider not only your business, but your personal financial situation in making that decision.

Cramer Soebbing is a wealth advisor at Mariner Wealth Advisors’ Chicago office.

This commentary is limited to the dissemination of general information pertaining to Mariner Wealth Advisors LLC investment advisory services and general economic market conditions. The information contained herein is not intended to be personal legal, investment or tax advice or a solicitation to buy or sell any security or engage in a particular investment strategy.

 

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