The Franchise Forum

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Tips on growing your franchise from one to ten or more locations

If your goal as a franchise business owner is significant expansion - and data would indicate it is, with over 50 percent of U.S. franchise units owned by multi-unit operators - you need to ensure you use your financing options strategically and properly prepare for the demands of running multiple franchise units.

Liquidity, cash flow and financial records

Recent data shows many prospective franchise owners prefer to go it alone, relying on personal and retirement savings for franchise funding. However, 70 percent also plan to obtain franchise loans to supplement their personal investment.

Strategically using loans is a shrewd, and often necessary, way to support franchise growth.

"The financing for your first unit is typically easier to obtain than financing for future units," says Randy Jones, head of originations at ApplePie Capital. "Therefore, if you have the choice between paying cash or getting a franchise loan for your first location, always get financing and preserve liquidity for future stores."

While your first franchise location can be financed based on business projections, keep in mind loans for future stores will be weighed based on the performance of your existing franchise units.

"Solid cash flow for your first units is going to enable quick growth, but if your units are struggling, obtaining financing is going to be a big challenge," Randy says. "Focus on good operations and strong cash flow to avoid a lot of problems with financing. When your operations are weak, even if you have good sales, it's going to be a red flag for lenders. Even if you're doing a million in sales, if you're running much higher costs than are typical for your franchise brand, it will represent a roadblock to getting financing."

Demonstrating a strong financial profile goes beyond strategically maintaining liquidity and ensuring positive cash flow, however.

"You should be able to present accurate financial statements at the drop of a hat."

"In order to grow efficiently, franchisees need to be able to show income on taxes and have very accurate profit and loss statements that are up to date," Randy says. "You need to have accurate records at the drop of a hat. If a lender asks you for them, make sure you're able to provide them in a timely manner. The people who have grown successfully understand the value of comprehensive financial statements and make that a priority."

This goes double if you plan on working with a partner to expand your franchise footprint, as lenders will pay close attention to the finances of all involved before making a final decision.

Preparing for franchise growth

There's a major difference between operating a single franchise unit and owning as many as ten franchise locations.

"When a person owns two locations, they can typically still be an operator, balancing their time back and forth between stores," Randy says. "Once you get to three, you have to be willing to bring other people on to help and complement your strengths and weaknesses. You need to have support to handle the entire business, whether it's outsourcing an accountant or relying on someone to oversee operations in another region. Assess what your strengths and weaknesses are before you expand too much, because you won't have enough time to manage both the operations and business issues that come up, from human resources to putting necessary infrastructure in place."

Lenders want to be sure you have a management strategy before making capital available, and some franchise brands may even require the hiring of area managers or similar infrastructure appointments to support the growth.

Be open to diverse funding options

Unless you have significant cash reserves, you will require franchise loans to meet your expansion goals. However, don't count on obtaining your franchise funding all from the same source.

"What franchisees need to be open to is an overall financing strategy to get from one to ten or more franchise locations, and it may involve several different lenders and various financing types," Randy says. "Approach financing strategically and be willing to accept that the lender that funded your first location may not be the same lender that funds your tenth location."

That said, maintaining liquidity, demonstrating positive cash flow, staying up to date with financial records and demonstrating commitment to successful expansion through an established management strategy will all go a long way toward making you an appealing loan candidate, regardless of which lender you use.

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