Franchising with no money, can it be done?

Many people find themselves in the frustrating situation of wanting to open a Franchise, but not having enough money. While this might seem like a unsolvable problem, we're going to give you a few tips and strategies that you can use to boost your odds in landing the Franchise of your dreams, regardless of how much money you have right now. 

Understand how much money you actually need

It's critically important to understand how specific Franchises charge their sign-up fees to new Franchisees. Unfortunately, this information isn't always that easy to figure out. A  quick Google search of 'how much money do you need to open a Tim Hortons', for example, shows the following information on the first page:

• $60 000-$465 700 (franchisehelp.com)
• $48 450-$1 690 300 (thefranchisemall.com)

So...are we looking at a maximum investment of around $500 000 or triple that? And of this money, do you need it all upfront or can you get financing? Will the Franchise loan you money upfront?

The problem here is that building your own Franchise is not as cookie cutter as you might think, and nor should it be. The more rigid the roll-out costs the harder it will be to adapt the model to the specific market and Franchisee that engage. Let use Pizza Hotline as an example in identifying how much money you actually need.

Pizza Hotline's financial requirements are as follows:

• Total investment range approx. $200 000 - 450 000, depending on store construction/renovation
• Minimum cash-on-hand: $60 000.00, which goes towards a $30 000.00 Franchise + Training Fee, and a contribution of $30 000.00 towards Working Capital

(as taken from www.phfranchise.ca, 2019)

So, you can see in the numbers above that while there is still a range of total investment, at least now you know that you will need at least $60 000 cash-on-hand to start the process, and that throughout the process you will need to acquire, raise, or otherwise get another $140 000-390 000 to finish your store's construction. There are a few key takeaways form this:

1. These numbers have come directly from Pizza Hotline. You can trust that they are an accurate reflection of the investment. In the Tim Hortons example above, most of the links on the front page of Google were not actually Tim Hortons links. Always go right to the source for information on a company to be absolutely sure you're not hearing or reading false data 
2. You need to compare how much money you have in your bank account or immediately accessible, only to the cash-on-hand value given by the company. While in the case of Pizza Hotline, $60 000 might still be too large of a number for you (see the rest of this article if that's the case), it's certainly a much easier number to reach than $450 000 would be
3. You need to think of how you will acquire the remainder of the investment amount within the next 6-9 months

Problems with cash-on-hand?

If you're finding yourself in a situation where you don't have anywhere near the amount of money needed to start the application process (for example, a minimum of $60 000 on hand for Pizza Hotline), then you still have a couple of options at your disposal.

First, you can look at your own cash and start saving and wait to apply. While this sounds like a stupid suggestion, it really does have merit. What are you spending most of your money on right now? Can it be avoided, or slimmed down to instead put that money into savings for your Franchise? If, for example you spend $100 on take-out, that adds up to $5200 at the end of the year that you can instead contribute towards your Franchise. If you pay for a car for your teenager, consider selling it and taking the money from the sale and the gas/maintenance savings and contributing to it. There are tons of ways that you can make changes in your everyday life, big or small, that will allow you to boost your savings in a relatively short timeline. Of course, there will be sacrifices that come with those changes, but it should pale in comparison to the upside of opening up your very own business! 

Second, you can look to available lines of credit or other already in-place financing form banks or credit houses. It's possible that you can pull out all the remaining money you need from here.

Third, if you have done an analysis of your own finances and you are still short, consider reaching out to family/friends for loans. These are the people who know you best and should have the most confidence in your ability to knock your own business out of the park. Be honest with them, and tell them that this is something you really want to do. You can cut them into the deal as a silent partner, offer them payback terms that work for both of you, etc. Remember, that if you're looking to open a Franchise there is typically a lot of data and information that you can present in backing up your loan request. If you're looking for your family friend to loan you $60 000 to open a Pizza Hotline, for example, you don't have to ask them to take your word for it. Instead, you can show them the stats: $1.4 million Average Unit Volumes, #1 in Market Share, etc. Now, the question of should you get the money is focused solely on if they think you will be able to do a good job with an already strong system, instead of having to also worry about whether or not you can create those systems. 

Cash-on-hand is typically the biggest worry for someone looking to open their own Franchise, as after this small business loans, grants, etc. are typically easy to obtain as long as you have at least decent credit. Once you pass through the Interview & Assessment Stage with a Franchisor and have given a Franchise Fee, you now benefit from the legitimacy of the brand when it comes to applications for loans, etc. to get the total financing. While there are exceptions, typically if a Franchisee can figure out the cash-on-hand, the Franchisor can advise them on how to best solicit the remaining total investment financing without much difficulty. 

Don't have savings, and can't get a loan?

Even in situations like this, you are not without options. However, you do have to find the right Franchisor. Most Franchises will tell you simply that if you don't have the money, then you should come back when you do. Some brands offer 'special considerations' for individuals who don't have the required funding, and may give them a loan or finance a location themselves. You need to find a Franchise that values character, and then show them what you can do. Pizza Hotline, for example, offers programs like this from time to time and is proud of the fact that many of it's longest-serving and most successful Franchisees were at one time the benefactors of these programs. 

Typically, in order for a person to qualify for these programs they need two things: attitude and effort. No Franchisor wants to turn away someone who they really believe will be their next great Franchisee, however, it's significantly harder to tell who that person is if they don't meet the minimum requirements, and have never worked in the company. To change this, offer to work in a store and work your way up into ownership. Franchisors who are serious about investing in their Franchisees will be thrilled to give someone who asks an opportunity like this. And think about it from your perspective: you get a front-row seat to how the business operates, so you can make absolutely sure that it's the kind that you want to own, you get paid to learn how to run the business, and you're already in the system which means you will probably get put to the top of the list when an ownership opportunity comes available.

The flip side of this, however, is the challenge that you really need to consistently show that you're the best person for the job. The Franchisor will hold you to an expectation much higher than that of your colleagues, because from day 1 they'll be trying to find out if you have what it takes and if, ultimately, you're worth their bet. As long as you're comfortable handling this pressure, Special Consideration placements or working in the Franchise yourself while saving up can be fantastic ways to speed up your financial and business ownership plans.  

'Low-Cost' Franchises: A warning

You may be asking yourself why the most obvious solution to the problem of not having enough cash to open a particular Franchise isn't just to find another model that has a lower upfront cost. After all, you can easily Google "cheapest franchises to get into" and find pages and pages of results. Take Pizza for example, where you can find hundreds of 'emerging franchises' at any given time that charge '0% royalties, 0% marketing, only $10 000 upfront', etc. Why would anyone pass up on these brands in favor of a more expensive one like Pizza Hotline, for example? 

Again, while there exceptions to everything, it's important to remember that most of the brands that advertise low-cost models are either a) new concepts, b) low-support Franchisors, or c) both. 

New concepts might be then next big thing, but you're essentially gambling on whether or not that will be the case. Remember, 20% of small businesses fail in their first year, 30% in their second, and 70% in their 10th year. If you're joining a Franchise, you want to be able to be successful for the long-haul, so you need to ask how long your 'low-cost' option has been around. Furthermore, if they are so sure that they're going to grow massively and that they're so unique, then why are their prices indicating the exact opposite? Typically you get what you pay for, regardless of the sales strategy used when selling it to you. 

Second, you need to figure out if there's anything actually special about the low-cost Franchise. If they're answer is one of:

• Look at how much money we've made already!
• Once we get across the country we'll be able to....

You should run. I would have the some of the highest stats in the NBA if I was coordinated and at least 7' tall, so would you. At the end of the day, if a brand doesn't have the history to back itself up, and something that makes it truly special, it's just a matter of time before it becomes another statistic, and that's not something you want to be a part of. 

 Third, it takes money to support a strong Corporate Office. Part of your selection criteria for a Franchise model will be questions like:

• What kind of national or regional marketing does Corporate provide?
• How effective are your marketing strategies? 
• Who handles store design and construction
• Who can I reach out to if I have questions about policies or procedures
• Do you offer any IT, development, etc. that I can use as a Franchisee

The best Franchisors offer all of the above and more, but remember, they need to earn enough money from somewhere to keep these systems up and running. While a 0% royalty might make you think at first glance that you'll be 'earning all of that money instead of paying it away', I would challenge you to instead look at it as "ok, I'm totally on my own here after I launch...will I be able to succeed like this". If the answer that question is yes, then you have found the diamond in the rough and you should pursue it. But most of the time, the answer is a resounding no. Franchisees need a strong model, and strong ongoing support to be able to maximize their own success. By all means, ask Franchisors how and why they use your royalty payments, but don't fall into the trap of believing that the lower the royalty the more advantageous it is for you in the long-run.