Most entrepreneurs are familiar with the popularity of venture capital funds and their role in funding startups and early-stage companies. But did you know that a component of venture capital funds — private equity financing — is also a great choice when it comes to franchise financing?
Private equity, also known simply as PE, refers to a broad range of funds that are pooled together by investors with the aim of increasing each individual’s buying power. Unlike other types of group funding that are publicly shared, private equity funds aren’t shared and are privately held.
For franchise owners, this is a positive as it invites investors who are interested in investing in growth-oriented, revenue-generating companies that have proven business models. In other words, private equity is inherently the ideal form of franchise financing.
Just consider the following common investment scenarios in which you might find it beneficial to work with private equity.
Maybe your best friend initially chipped in, or a neighbor who was initially excited about the idea invested but has since grown wary. There are plenty of reasons why old investors might become tired of, or bored with, an idea. Working with a private equity financing group is a great way to breathe new life into a venture.
Maybe you’re just beginning with your franchise operation, or maybe you’ve been working hard for more than a year and are in need of more significant expansion funds. After all, it’s not uncommon for even owners of highly prosperous businesses to find their funds for expansion being tapped out. Perhaps your business and personal assets have already been pledged as collateral on loans from traditional financial institutions, or you’ve already diverted extra funds to other causes.
This is where private equity funds can assist in furthering your franchise financing to enable new and prospering business owners to continue with their developments by funding and investing in expansion goals like acquisitions, new equipment and expanding product line developments.
Once you’ve signed the papers and the franchise financing funds have been transferred, you’ll begin the largely hands-off working relationship with your PE firm. While terms vary, most PE firms won’t get too involved with the day-to-day running of your operation.
Instead, they’ll likely request seats on your board so they may have a say in major business decisions, as well as putting limit controls. Some might insist on either appointing individuals or having a say in the hiring of positions on your management team. It’s important to understand all of these details before signing any franchise financing agreements to ensure you know what to expect with the PE group.
While private equity groups can be a very smart choice for franchise financing, they aren’t the only financial solution. The best source of information about the financing options available to you is the specific franchisor you’re considering joining.
The franchisor’s headquarters will be well acquainted with the costs that are associated with every available option. In many cases, the franchisor will already have programs established with selected financial sources; often this includes a batch of willing private equity firms, which will facilitate the rapid funding of new franchisees.
In fact, we recommend all those considering opening up a franchise location to first contact their franchisor for information about potential financing options. A good and reliable franchisor will have this information at hand and ready.
For more information about private equity firms, and other forms of franchise financing, contact us today.