In the past several weeks, this column has looked at franchises, and has found both good and bad. Regardless, understanding that all small businesses pose some risk, franchises remain a good option for those looking for an established brand rather than doing a start-up that carries a much higher degree of uncertainty.
That begs the question of how a person can find out more about franchises and start the process. The Small Business Administration is a good place to start. At www.sba.gov, there are numerous posts on franchising and a definition of what it means to be an SBA-approved franchise. There is also a link to the list at www.franchiseregistry.com where all approved franchises can be searched.
It is important to note that being listed as an SBA-approved franchise is not an endorsement. Being approved means that the SBA has reviewed the disclosure documents and found them acceptable for SBA-backed financing. The use of the word “approved” can be misleading.
“Franchise seekers are misled to think that an SBA-approved franchise is of better quality than one not on the approved list,” said Jerry Chautin, a SCORE volunteer. “That’s not so. SBA’s criteria to be in the Franchise Registry list is based upon the degree of control exercised by the franchisor over the franchisee. If there is too much control, the franchisee may be acting more like a branch office of the larger franchisor’s organization.”
If not on the list, additional documentation is needed to process a loan application. In fact, some lenders will not even accept loan applications from franchisees until the franchise is on the registry. They reason that the application process will be overly time-consuming if they are forced to start at square one.
With franchises listed on the registry, the loan is essentially pre-approved provided that the franchisee is a qualified borrower, and the approval process is streamlined.
“But again,” Chautin said, “it does not reflect on the safety or quality of the franchise. So you still have to do extensive due diligence before making a buying decision.”
The SBA advises that being on or off the list is not an indication of quality and profitability, and also emphasizes the need for thorough research. The loan application will look at general eligibility, conflicts of interest, use of proceeds, and the business plan. Even though the franchise may present a detailed plan, the applicant is still required to write out his or her own specific plan.
In addition, common documentation is required. This will include: the purpose of the loan, history of the business, detailed financial statements for three years if buying an existing franchise, projected opening-day balance sheet for new franchises, lease details, owner investment, cash flow projections, signed personal financial statements, and a personal resume. An SBA loan checklist can be found on its website.
The franchise information provided on the registry should be considered a first step. As Chautin emphasized, homework is essential. Learn everything you can about the franchise, industry, and the satisfaction of current franchisees. Lastly, make sure it’s a good fit.
Tina Dettman-Bielefeldt is co-owner of DB Commercial Real Estate in Green Bay and district director for SCORE, Wisconsin.