Once you’ve made your decision to purchase a specific franchise business, you’ll be faced with choices on how to pay for it. And, these days, there are lots of choices.
Let’s look into what’s available, so you can move forward with being your own boss.
Paying Cash for a Franchise
Some of you may be fortunate enough to be able to write a check for the franchise opportunity you’ve decided on buying. Congratulations! But, should you? Should you use your own money to pay for your franchise business in full?
There are a couple of things to look at if you’re thinking of using cash to buy a franchise business-or any type of business.
The first thing-and this is huge, is that you’ll achieve break-even faster...which will bring your business closer to profitability. That’s because if you chose to go with a small business loan, for example, you’d be saddled with making monthly loan payments-with interest.
The other thing about paying cash for your business; you’ll have less cash on hand for emergencies, personal or business. It’s something to think about.
Obtaining Traditional Franchise Financing
Things have changed a lot since the financial meltdown. Lenders are way more cautious about loaning money to business startups.
Things have gotten much better during the past two years, but it’s still not a piece of cake to obtain a small business loan.
One very popular option that’s used to obtain a loan for a franchise business is to go through the U.S. Small Business Administration. (It’s important to note that the SBA does not loan money directly. They provide partial guarantees for loans through banks that participate in their programs.)
If you’re thinking about getting a franchise loan through an SBA approved lender, here’s a checklist of the things you’ll need to gather, along with the forms you’ll have to fill out. The checklist looks intimidating; if you need help gathering information or completing forms, ask a CPA familiar with small business loans or one of the franchisees you talked with during your due diligence, for help.
“Rollover as Business Start-Up.” That’s what the letters in “ROBS” stands for.
This method (of getting money to buy a franchise) involves tapping into a portion of your retirement plan. Here’s what’s involved-courtesy of Guidant Financial.
- A new business is established as a C corporation
- That corporation creates a qualified retirement plan that can invest in private stock — usually a 401(k)
- Funds from the existing retirement account are rolled into the new retirement plan without triggering a taxable distribution
- The new plan then purchases stock in the C corporation
- The C corp acquires or starts a business using those funds
Over the years, several of my clients have gone this route to finance their franchise businesses. Personally, I’m comfortable* with people using their retirement funds to buy a franchise as long as they’re only using a portion of them.
*If you’re considering this option, you’ll be hard-pressed to find a financial professional or CPA who likes the idea. Their reasons have to do with a couple of things:
- A lack of knowledge about the product-and how it can be used to fund a startup.
- In the case of a CPA, it’s their (generally) inherent conservative nature that usually-and swiftly, puts the kibosh on any idea that involves tapping into one’s retirement funds for anything other than, well, retirement.
It’s always good to hear both pros and cons when it comes to a major decision-like one involving money. But, it comes down to personal choice.
As you’ve seen, when it comes to paying for a franchise, there are a few different ways to do it. All you have to do now is choose the one you feel is right for you.
The Franchise King®, Joel Libava, is a top franchise expert. If you're looking to buy a franchise, be sure to check out his private consultations, his popular books, and his comprehensive new franchise ownership course. Go here to learn more about The Ultimate Franchise Course and the extraordinary offer he just put together.