Tick...tick...tick...the clock is running. Small businesses today face a deadline. Even though a business attracts customers, it must grow quickly before the competition moves in. Small businesses in order to succeed need to differentiate and grow. Whatever differences about a business can be copied if they don't keep moving. And if it is copied by businesses that are better financed, they will leave them in their dust.
The answer, of course, is to find capital for growth. But as many businesses already know, the capital generated from current operations, no matter how profitable the business may be, simply isn't enough. A business owner could afford to build one, maybe two, new distribution units from such capital. But in the time it takes to get one or two units up and running, a wealthy competitor can generate ten. An owner's advantage is lost.
Where, then, will the money to grow quickly come from?
One could start at the bank, of course. But an owner may find that no matter how friendly a local banker has been in the past, when they go to borrow money to expand their business, the question of collateral will come up. "But look how well we're doing with minimal advertising," you will say. "If we had a dozen more units in this market we could afford TV and maybe even double our unit sales."
"I agree one hundred per cent," says the banker. "And if you can provide collateral, we'll provide the money at a very attractive rate."
As the business owner turns to leave, the banker may mention the Small Business Administration's loan program. The SBA does guarantee loans by banks up to about $1 million to businesses that qualify. Trouble is, when an owner thinks about it, a loan is just that -- a loan. You've got to pay the money back, plus an interest of maybe 10%, and on an established schedule. If a business owner is embarking upon a program of rapid expansion, it's vital that profits be poured back into the business for at least a year or so. But lenders -- even those with SBA guarantees -- don't like to wait.
Well, then, if loans are hard to get, expensive, and must be paid off too quickly, what about investment capital? Certainly, if an owner can find enough investment capital without too many strings attached their rapid growth problem would be solved. But friends, relatives and true believers willing to wait indefinitely for payback may be in short supply. Anybody else -- venture capitalists, for example, will demand equity in the business in exchange for their dollars. Even an IPO, if an owner can swing it, comes with a long list of restrictions upon your powers as CEO, beginning with a board of directors.
That leaves only one source of capital: people who admire the business so much that they want to clone it, namely franchisees. If the cost of a new unit of the business is as low as $300,000, a single franchisee can take an equity mortgage on his or her home and have enough to get started. Even if the franchisee needs a loan, he or she will have an easier time getting it than you would have borrowing money to build a second or third unit!
And, of course, some well-heeled franchisees, if they like the concept, may be willing to establish multiple units in a given territory.
What does a business owner give in return for the franchisee's capital? They give the right to use their business name and system. They agree to train the franchisee and give ongoing support. They also agree to listen to franchisees when they have ideas for improving the business. That's it. Of course, the franchisor does not own the franchisee's business, or even a part of it. But they do get a franchise fee at the beginning to pay for training and support. They also get an ongoing royalty -- a percentage of his or her gross (that's right, gross) sales. So, if the franchisor sells nine franchises in the first year (the average number sold in their first year by the franchisors polled in the '90s by DePaul University and Francorp), they will not only have the start of a fast-growing chain, they'll have roughly $300,000 in franchise fees (assuming a $35,000 franchise fee, again the average named in the DePaul/Francorp study) to work with, plus royalties of course.
So just how good is your business? Would other people like to own one like it? If so, maybe they'll be the source of the money you need to grow.