January 1, 2010, Newsletter Issue #110: Analyze Capital

Tip of the Week

In selecting a franchisee, you need to evaluate their financial situation. You want to know how they’re funding the franchise and if they’re going to be financially upside down upon purchase. You need to carefully consider the viability of the franchise and plan with the franchisee to achieve the best financial results.

Normally the franchisee’s financial resources come from one of three sources:

Personal resources such as savings, home equity, cash values from life insurance, bonds, stocks, bank loans and retirement plans. Other resources, such as lenders and investors, relatives and friends, small town and major regional banks, non-bank lenders, SBA guaranteed loans, lease financing companies, private capital and partners. Franchisor assistance, such as offering help to prepare loan applications or directing franchisees to financing sources that have familiarity with the franchise and an interest in servicing qualified franchisees. You may even guarantee loans and commitments to lenders, defer part of the franchise fee, lease real estate and equipment, commit to equipment and inventory buy back, offer equity participation or match investors and operators together in a joint venture.

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