MULTI-UNIT OPERATORS

 

Funding Strategies & Tips

The most important thing to know if you want to become a multi-unit operator is that how your first unit is funded affects your ability to fund future units. So, if you are arranging financing for the first unit without considering how it is going to affect your ability to get additional financing, you may find yourself without any options to fund additional units. Since many larger franchises require a 3-unit commitment, the most common scenario is a “three-pack” over a 2-3 year window.

Popular strategies:

Scenario: An individual wants to open 3 locations in 24 months and has the capital to fully self-fund the opening of one unit with a substantial amount of cash leftover.

Tip: In almost all cases, seek the largest loan amount possible for store #1. This enables you to hold onto liquid assets for cash flow in case additional working capital is needed and also helps for the equity injection for store #2.

Strategy #1

•   Make a 30 percent equity injection of the total start-up costs for store #1 and finance 70 percent through an SBA loan. 
•   Nine months later, inject 30 percent of the total start-up costs for store #2 (if store #1 has turned profitable and is close to or has exceeded the original projections) and finance 70 percent through a second SBA loan. 
•   In 12 to 18 more months (if store #1 is fully profitable and store #2 has broken even and is hitting projections), seek an expansion loan of stores #1 and #2 to open store #3 for 30 percent of the total project costs, and guarantee the loan with the cash flow and assets of stores #1 and #2. 

Strategy #2

If store #1 is slightly profitable, and store #2 has broken even and is hitting projections:

•   Inject 30 percent of the total start-up costs for store #3 and finance 70 percent through an additional SBA loan. The business owner would have now injected a total of 110 percent of opening a signal store, and the ability to inject the additional 10 percent would come from the cash flow of stores #1 and #2. It is still possible to obtain financing for the third store, assuming neither of the previous stores is in financial difficulty and both can provide a guarantee for the third location.

Strategy #3

If significant time has passed (24 months) and the first 2 locations are doing well:

• Obtain an expansion loan (up to 90 percent of the total project costs) for store #3. Especially if the cash flow from stores #1 and #2 can help support the debt service for store #3. If stores #1 and #2 can fully service the debt for store No. 3, then 100 percent financing is possible. 

Every entrepreneur and situation is unique. What works for one may not be acceptable for another with the exact same financial circumstances. To come up with a personalized strategy that works best for you, you may want to consider consulting with a trusted funding expert who can review your personal financial statement and take into account your goals and preferences.

Learn More about Franchising

Franchising 101

“Owning a franchise allows you to go into business for yourself, but not by yourself.”
A franchise provides franchisees with a certain level of independence where they can operate their business.

Resources and Education

The International Franchise Association is committed to educating prospective franchisees on the dynamics of franchising and providing them with information to begin their evaluation of whether to become a franchisee. Beginning with the adoption in 1970 of the first franchise disclosure requirement in California.

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