Where New Franchisors Can Find Capital
by Ed Teixeira
During current economic times, it’s often difficult for start-up franchisors
to obtain investment capital. This article describes three potential sources of
investment capital that can meet the capital needs of new franchisors.
There are three investment groups that can be a source of funding to new
franchisors. Each of these groups has unique features. Regardless of which group
you pursue be sure you have a well written business plan and executive summary.
Also, the financial projections must be realistic and sound. Finally, learn
about these investment groups by attending workshops and networking groups.
An angel is a high net-worth individual who invests his or her own money in
start-up companies in exchange for an equity share of the businesses. Angels
typically invest between $25,000 and $100,000 per transaction individually, and
from $250,000 to $750,000 as a group. Angel investing represents a significantly
large and growing portion of early stage capital available to startup companies.
Facts about Angels:
- Usually receive a high
equity value due to early stage investments
- Due to risk, Angel
investors usually seek returns of 10 times their original investment
- Total investments in 2009
were US$17.6 billion, a decrease of 8.3% over 2008.
- The total of Angel
investments is larger than investments by private equity groups.
- A total of 57,225
entrepreneurial ventures received angel funding in 2009, a 3.1% increase from
- Post-seed/startup investing
represented 62% of investments, an increase from 2008, indicating angels’
increased interests in the early and expansion stage.
If you’re interested in pursuing Angel Investors be
prepared to bring the following attributes:
- They look for high-quality
entrepreneurs with a track record of leadership and performance - either in the
company's specific industry or in prior entrepreneurial ventures.
- Have a product or service
that fulfills a need for a large market that will produce revenue.
- The invested funds must be
used to add value to the company not to instantly reward the owners or retire
- Have a competitive edge
through a proprietary product or service. Investors will want to see entry
barriers for your potential competitors.
- Be able to demonstrate that
your company can have substantial growth and increased profits.
- Have a clearly articulated
Small Business Investment Companies
Created by Congress in 1958 the mission of the Small Business Investment
Company (SBIC) program is to improve and stimulate the national economy and
growth of small businesses by supplementing the flow of private equity capital
and long term loan funds. This multibillion dollar, government-sponsored group
of funds invests long term capital in privately owned and managed investment
Facts about SBICs:
- Administered by the
Investment Division, US Small Business Administration
- An institutional LP,
managing $8.1 billion in outstanding leverage and commitments
- An investor in 311 private
- 361, or 24% of SBIC financings went to companies less than 2 years old 1,477
companies benefited from SBIC financing SBIC financings totaled $1.8 billion
- 400 licensed SBICs in
- Only, companies defined as
“small” (net worth is $18.0 million or less) are eligible for SBIC financing
- Most SBICs concentrate on a
particular stage of investment (i.e. start-up, expansion or turnaround
For those seeking to contact a SBIC and make a presentation for funding go to
the SBA website, where you can navigate to a directory of SBICs by State. Be
prepared to follow the same information process outlined above for Angels.
These programs are designed to assist the development of companies through an
array of business support resources and services, developed and orchestrated by
incubator management and offered both in the incubator and through its network
of contacts. Incubators vary in the way they deliver their services, in their
organizational structure, and in the types of clients they serve. Successful
completion of a business incubation program increases the likelihood that a
start-up company will stay in business for the long term. The BI can choose to
serve select clients compared to SBDC that are required by law to offer business
assistance to any company that contacts them for help.
Facts about Business Incubators
- Designed to accelerate the
successful development of entrepreneurial companies
- Chapters in most major
- Entrepreneurs who wish to
enter a business incubation program must apply for admission.
- Help with business basics
- Marketing assistance
- Help with
- Access to bank loans, loan
funds and guarantee programs
- Access to angel investors
or venture capital
To find a BI in your area go to the National Business Incubator Association
To summarize: For franchisors looking to obtain investment capital the
preceding three groups focus on working with smaller companies. Take advantage
of these resources and as a reminder be persistent and be willing to persevere.
It can take from 6 months to a year to finally get you money.
© 2010 FranchiseKnowHow, LLC
Ed Teixeira is the President of FranchiseKnowHow, LLC.
He can be reached at