Buy a Franchise

Article excerpted from The Small Business Encyclopedia, Start Your Own Business, Entrepreneur magazine and Entrepreneur's Be Your Own Boss.

If buying an existing business doesn't sound right for you but starting from scratch sounds a bit intimidating, you could be suited for franchise ownership. What is a franchise--and how do you know if you're right for one? Essentially, a franchisee pays an initial fee and ongoing royalties to a franchisor. In return, the franchisee gains the use of a trademark, ongoing support from the franchisor, and the right to use the franchisor's system of doing business and sell its products or services.

In addition to a well-known brand name, buying a franchise offers many other advantages that aren't available to the entrepreneur starting a business from scratch. Perhaps the most significant is that you get a proven system of operation and training in how to use it. New franchisees can avoid a lot of the mistakes start-up entrepreneurs typically make because the franchisor has already perfected daily operations through trial and error.

Reputable franchisors conduct market research before selling a new outlet, so you'll feel greater confidence that there is a demand for the product or service. Failing to do adequate market research is one of the biggest mistakes independent entrepreneurs typically make; as a franchisee, it's done for you. The franchisor also provides you a clear picture of the competition and how to differentiate yourself from them. Finally, franchisees enjoy the benefit of strength in numbers. You'll gain from economics of scale in buying materials, supplies and services, such as advertising, as well as in negotiating for locations and lease terms. By comparison, independent operators have to negotiate on their own, usually getting less favorable terms. Some suppliers won't deal with new businesses or will reject your business because your account isn't big enough.

Franchise or Business Opportunity?

Business opportunities are less structured than franchises, so the definition of what constitutes a business opportunity isn't easy to pin down. In essence, a business opportunity is any package of goods or services that enables the purchaser to begin a business and in which the seller represents that it will provide a marketing or sales plan, that a market exists for the product or service, and that the venture will be profitable. Here are other key factors:

The Pros

The greatest strength of franchising is its ability to bring independent retailers together using a single trademark and business concept. The benefits of this affiliation are many: brand awareness, uniformity in meeting customer expectations, the power of pooled advertising and the efficiencies of group purchasing.

For the individual owner, there are several advantages to franchising. The ever-present risk of business failure is reduced when the business program has already proved to be successful in the marketplace; the use of an established trademark saves the business owner the cost of creating and advertising a name that customers will recognize; and the advantages of group advertising and purchasing make operations more profitable. In addition, ongoing training creates an instant operational expertise that would otherwise need to be acquired through trial and error. Also, with franchising, expansion seems to come more naturally. Operating a successful franchise may quickly lead to building a second and then a third business, and so on. Fortunes have been built this way.

• Reduction of risk
• Turnkey operation
• Standardized products and systems
• Standardized financial and accounting systems
• Collective buying power
• Supervision and consulting readily available
• National and local advertising programs
• Point-of-sale advertising
• Uniform packaging
• Ongoing research and development
• Financial assistance
• Site selection guidance
• Operations manual provided
• Sales and marketing assistance

The Cons

Franchising, however, is not for everyone. Fiercely independent entrepreneurial types (you know who you are) may chafe under the strict operational requirements and specifications of a franchised business. If things have to be done your way, you may want to head in another direction.

Also know that some franchise systems are better than others. A weak franchise program will not train you well to handle the challenges of the business, will not do a good job of assisting you when problems arise, and will not make the best use of your advertising dollars.

The Downside

• Loss of control
• A binding contract
• The franchisor's problems are also your problems

If you're considering buying a franchise, don't let wild expectations influence your decision. While franchising is designed to put people into business who have never owned a business before, the excitement of ownership can create an impulse to move forward without proper planning. If you rush headlong into buying a franchise expecting to boost your current working salary, but the earnings don't allow you to pull out more than half your former salary, you will be one unhappy camper. Work with a good CPA to prepare a cash-flow projection for the business before you take the plunge. Know how long it will take to break even and turn a profit, as well as the amount of salary you'll realistically be able to pay yourself.

Associated Costs

In terms of capital investment, your franchise fee will be determined by the profitability of the business. Most companies have a scale when it comes to franchise fees. They can range anywhere from $4,000 to $20,000 and, in some cases, up to $50,000. In addition to this front-end franchise fee--the one-time charge that a franchisor assesses you for the privilege of using the business concept, attending their training program, and learning the entire business-there will also be an ongoing royalty fee, typically ranging from 3 to 8 percent.

Some of the other costs associated with a franchise include:

Facility/Location
In some cases, you may also have to buy land or a building, or you may have to rent a building. If you rent a building, you'll be responsible for not only the monthly lease but for the one-time security deposit as well. In addition, you'll have to pay for leasehold improvements. In some cases, the owner of the building will put these in and factor them into your rental, probably charging you an additional $50 to $100 per month. The franchisor might provide you with an allowance for leasehold improvements that runs in the neighborhood of $5,000 to $30,000 for your average franchise. Most franchisors will tell you what their estimated leasehold improvements will be.

Equipment
Different types of businesses will need various pieces of equipment. There are generally long-term payments available for most equipment purchases. Fortunately, most banks will provide loans for equipment because it also serves as collateral.

Signs
Outside signage can be very expensive for the small-business owner. Most franchisors have developed a sign package that the franchisee is obligated to purchase.

Opening Inventory
This will usually consist of at least a two-week supply, unless you're in a business that requires a much more complicated inventory. Most franchisors will tell you what their opening inventory requirements are.

Working Capital
For rent, you may be required to deposit first and last months' payments as well as a security fee. You'll also have to pay a deposit to the electric, gas and telephone companies (who will want deposits prior to giving you service). You'll need some working capital and money in the cash drawer to make change. You'll need money to pay your employees. You'll need money just to operate until there's a cash flow. If you're buying a franchise that relies on charge accounts, you're going to have to allow yourself some additional capital before the bills are paid by the customers and returned to you.

Advertising Fees
There is usually a fee for advertising on a regional or national basis. Most larger franchisors require their franchisees to pay a certain amount into a national fund used to advance the concept. For example, McDonald's has advertising funds of nearly $100 million, paid by the franchisor and individual franchisees. The upside is the benefits are quite substantial in terms of the visibility you get with the type of advertising that most franchisors do.

Franchise Law
An important protection for the person planning to buy a franchise is the FTC's Franchise Rule, put into effect October 21, 1979. The rule requires covered franchisors to supply a full disclosure of the information a prospective franchisee needs in order to make a rational decision about whether or not to invest. This disclosure must take place at the first personal contact where the subject of buying a franchise is discussed and at least 10 business days prior to signing any contract with the franchisee or accepting any money. This is a "cooling-off' period intended to prevent franchisees from jumping in without carefully reviewing and considering what they're doing. This means a franchisor, franchise broker or anyone else representing franchises for sale has to present a disclosure document-the Uniform Franchise Circular Offering (UFOC)-containing extensive information about the franchise. Furthermore, you must be provided with completed contracts covering all material points at least five days prior to the actual date of execution of the documents. Again, this provides another cooling-off period and the chance to have an attorney review the contracts prior to execution. Visit the FTC's Franchise and Business website to find out more about the Franchise Rule.

State Laws
The FTC doesn't require franchisors or business opportunity sellers to register with it or any other government agency. However, several states do have registration rules requiring franchise sellers to register. Some of these states laws are tougher than others, but most have adopted the UFOC guidelines for their disclosure requirements. It would be a mistake, however, to assume that simply because a franchise is registered with a state or provides some type of full disclosure document, you as a consumer are going to be protected from the possibility of failure or rip-off. The only thing that a state reviewing agency can do is ensure that the franchisor has responded and filed the necessary documents.

Begin Your Search

The first part of the franchise research process is to conduct a brief self-assessment of your personal strengths,weaknesses, likes, dislikes and resources. These psychosocial dimensions can guide you through the many decisions you'll face in the franchise evaluation process. Without these personal signposts, it's easy to lose your way.

Check your investment resources. List them on paper. Note liquid resources, your cash on hand, savings and that rainy-day cookie jar of $5 bills you buried in the backyard. What other personal resources can you scare up? If your Aunt Gertrude once offered to help you get started in business, now is the time to talk to her. If your bookworm sister just aced Regis Philbin out of $1 million on national television, maybe now is the time to talk business loan (if she says no, you have the perfect response: "Is that your final answer?"). Do you have equity in your house or other assets that can be pledged for a loan? Write them down. Expect to call on virtually all your personal financial resources when you purchase a franchised business.

Knowing your resources saves you considerable time when narrowing down choices in a franchise investment.

Once you've decided a franchise is the right route for you, how do you choose the right franchise? With so many franchise systems to choose from, the options can be dizzying. Start by investigating various industries that interest you to find those with growth potential. Narrow the choices down to a few industries you are most interested in, then analyze your geographic area to see if there is a market for that type of business. If so, contact all the franchise companies in those fields and ask them for information. Any reputable company will be happy to send you information at no cost.

Of course, don't rely solely on these promotional materials to make your decision. You also need to do your own detective work. Start by visiting your library or going online to look up all the magazine and newspaper articles you can find about the company you're considering. Is the company depicted favorably? Does it seem to be well managed and growing?

Check with the consumer or franchise regulators in your state to see if there are any serious problems with the company you're considering. If the company or its principles have been involved in lawsuits or bankruptcies, try to determine the nature of the lawsuits: Did they involve fraud or violations of FTC regulatory laws? To find out, call the court that handled the case and request a copy of the petition or judgment. If you live in one of the 14 states that regulate the sale of franchises, contact the state franchise authority, which can tell you if the company has complied with the state registration requirements. If the company is registered with Dun & Bradstreet, request a D&B report, which will give you details on the company's financial standing, payment promptness and other information. And of course, it never hurts to check with your local office of the Better Business Bureau for complaints against the company.

Now that you've got an idea of the industry you're interested in and the financial requirement you can commit to, try visiting a franchise trade show. They're a terrific way to gather a lot of preliminary information and survey the field in a short period of time, and you can find them in most good-sized cities.

When attending a franchise trade show, keep a few thoughts in mind. First, remember the companies exhibiting at the show by no means make up the entire universe of franchise opportunities. In fact, these events showcase only a small selection of the available franchise programs. Second, you should take full advantage of the information available. Stop by the booths of all the companies that fit the business profile you outlined in your goal--planning sessions. Leave your name and address with those companies that interest you. Ask questions, and listen carefully to the answers. Gather handouts and take notes. You'll get a good feel for franchise discourse, the questions to ask and the key sales points in any program.
Use this guide to help you make the best of your franchise trade show visit.

Before the Show:

After the Show:

Navigate the Paper Trail

Through your preliminary research,you've found a great franchise opportunity. Butbefore you sign on the dotted line,youneed to find out if this opportunity is as good as it sounds. Your next step is to analyze it thoroughly to determine whether it's really worth buying.

Much of the information you'll need to gather in order to analyze a franchise will be acquired through the following:

Don't be shy about asking for the required materials from the franchisor. After all, they'll be checking you out just as completely. If they aren't, that should sound a warning bell. Another warning sign is if the franchisor asks you to sign a disclaimer stating you haven't relied on any representations not contained in the written agreement. Such a requirement could indicate that the franchisor doesn't want to be held responsible for claims made by its sales representatives.

The UFOC is a mother lode of investor information, designed to give prospective franchisees all the information relevant to the franchise offering. The UFOC contains the facts that state and federal regulators consider important to your decision regarding whether to buy the franchise. The UFOC is designed to protect you, the investor, and you'll find it enormously helpful.

The document is made up of three basic sections sandwiched together: first, 23 sections describing various aspects of the franchise program; second, a set of the franchiser's audited financial statements; and third, a copy of each form or contract you'll sign if you buy the franchise.

State and federal franchise laws require that a franchisor deliver a copy of this document to you at the first personal face-to-face meeting with you or 10 business days before the contract is signed or money is paid, whichever happens first. This means you may not receive a UFOC simply by requesting it (although some franchisors will send one on request), but you should certainly receive a copy well before you're asked to pay money or sign a binding contract. Ask the franchisor for a UFOC early in your investigation; it may save you a great deal of time.

The first fundamental mistake most franchise investors make is to put the UFOC aside and not bother reading it. Sure, it can be a bit intimidating--some UFOC documents are thick, bound minibooks--but they're not impenetrable. If you understand what you're looking for--the red flags that should alert you to investigate the business further--and focus on the key investment information, the UFOC is an extremely useful introduction to the franchise program you're considering.

Not all the information in the UFOC is enlightening or particularly useful, but you can dig out much that is. Look for this key information as you read:

One of the UFOC's strengths is that it delivers three years of audited financial information about the franchisor. Item 21 of the offering circular should include the balance sheet for the most recent fiscal year and an income statement, as well as changes in financial position for the most recent three years. These financial statements are audited reports prepared by a certified public accountant. Subsidiaries are allowed to use a parent's financial information, but only if the parent corporation will guarantee the obligations of the subsidiary franchisor.

The sample pro forma operating statement provides a forecast of projected sales and expenses that might be incurred by a franchisee in the geographical zone where the unit might be located. Very few franchisors provide this information or make any earnings claim. In part this is because such claims must be substantiated by backup data, according to the FTC.

Earnings claims must represent what the average franchisee can achieve, not what one unit made in the program. They can never guarantee that any franchise will achieve a stated level of performance. Data from nearby franchisees can be used, or data from franchisees in an area similar to yours from a demographic, socioeconomic or location standpoint.

The sample pro forma will be accompanied by a caution label required by the FTC. It contains the following caution: "These figures are only estimates of what we think you may earn. There is no assurance you'll do as well. If you rely on our figures, you must accept the risk of not doing as well."

Although many franchisors are reluctant to provide earnings projections, insist on seeing one. You'll need a realistic forecast that states what your income and expenses might be. Take caution to heart also. Don't simply rely on these figures as an accurate basis for projected income and expenses. Cross-check the data as much as possible. When interviewing other franchisees, ask them what their income and expenses are. In addition, talk to industry associations and independents involved in the type of business you will be purchasing.

The franchise agreement is the foundation on which your franchise is built. It gives both parties a clear understanding of the basis on which they're going to operate. It should ensure uniformity to protect the franchisee as well as the franchisor. Remember, your business is only as good as that same business down the street or in the next town. If people have a bad experience with another franchisee, the odds are they're not going to want to do business with you either.

There's an obligation on your part to sustain this uniformity. This agreement establishes standards of operation including what quality products you're going to use and what quality services you must provide. It eliminates future problems and has a deterrent value. A lot of problems can be avoided if you know that a certain activity would violate the franchise agreement. The company won't try to do something to you that it knows is a violation of the agreement. By the same token, you may not try to do something that you know is a violation.

The franchise agreement provides for remedies in the event of defaults. It outlines what will happen if you do something wrong, including the steps and notices the company must give you. After the company gives you this notice, how much time do you have and why? If you don't agree with the demands, what recourse do you have? The franchise agreement provides for all of this.

The following information is inherent to an agreement:
It states that you're a part of the franchise and have a certain fixed fee to pay as part of the consideration. It has location provisions. The company will have the right to approve sites. If the company desires, it will have the right to go on a direct lease. In some instances, your franchise agreement might even be tied to a lease directly. The company will determine what the plans and specifications of the general location should be, and will provide that your equipment conform to company specifications. By the same token, the company has the responsibility to assist you in site and equipment selection and in the general layout of your business, so you can have every opportunity to succeed. That's part of the franchisor's obligation and is stated in most franchise agreements. The agreement will have a section covering the use of the proprietary market and the use of the franchise name. Franchisors will provide that you may not contest their right to the use of that name and will also provide that you must notify the franchisor if somebody else is using the franchisor's name in your area. The agreement will require that you conform to the operating manual and use the products, systems and supplies specified by the company.

Here we get into an area of trust. For example, a franchisor can't require you to buy a product that's available at a better price somewhere else. That's in violation of antitrust laws. These laws have become a great concern to franchisors, since some have gone out of business because they violated those laws and were sued by franchisees.

Obtain Professional Advice

After you receive the UFOC, you must take another vital step to make the most of it: Find professional advisors to help analyze it. Unless you're experienced in reading financial statements and analyzing complex commercial contracts, the money it costs for the assistance will be well worth it.

Using the information in the UFOC, a good accountant can put together a projection for your planned business and give you an educated guess about whether it will be profitable and how much money it may generate. Without a basic cash-flow needs analysis, you'll have no idea how much capital you'll need to run the business and no clue as to whether it will meet your income needs.

An attorney is invaluable in reviewing the UFOC and the franchise agreement. The franchise agreement is usually quite long and complex--after all, it will govern a complicated commercial relationship over a long period of time. An experienced eye looking it over with your interests in mind can identify any essential points of negotiation. Your lawyer can also explain exactly what all that legalese means for you as a franchisee.

Interview Both Sides of the Franchise Equation

After you've received all the documents from the franchisor, you'll enter a preliminary negotiation stage before you sign. This is the most critical period in your dealings with the franchisor. At this point in time, you'll meet a representative of the franchisor and conduct interviews with as many franchisees as possible in order to evaluate the franchise package. This provides an opportunity for both you and the franchisor to form first impressions and determine whether negotiations will proceed any further.

The representative of the franchisor may be one of three people: the franchise owner/company president, an in-house salesperson or a franchise broker. No matter which one of these people you meet, he or she will want to know more specific information about you.

The franchisor is going to want to know more about your financial status, experience and general background. If the franchisor doesn't ask these questions or show any interest in your previous background, that should be a danger signal to you. When they do ask you questions regarding these topics, however, don't feel they are prying into your personal life. They aren't. They're just protecting their interests. Prepare questions of your own about the company. You might even want to have your attorney present or have an attorney highlight areas of the franchise agreement and UFOC that should be questioned. Don't leave until you've been supplied with all the information that you need. This could take anywhere from a few hours to a whole day. Your primary goal should be to satisfy all your doubts so that you feel comfortable with the data supplied by the franchisor.

During your interview, you really want to concentrate on some key areas that will help you determine the strength of the franchise:

Don't just settle on any franchise.

If you run across a franchisor that is reluctant to pass along a list of current franchisees, makes promises that you'll earn a fortune on a limited investment, insists on deposits for holding a franchise unit, tries to convince you to sign before someone else does, or is full of empty rhetoric when answering your questions, head for the door. These are franchisors that are probably trying to pull a fast one to get your money.

You owe it to yourself to talk to as many current franchise owners as you can. Just get in the car and head out to see them. You'll find names, telephone numbers and addresses right in the UFOC (Item 20).

Franchisees' view of the franchisor and the value of the franchise system will be enlightening. Make sure you interview a large sampling of franchisees. Some will have good experiences to report; others may preach doom and gloom. Remember, no one can predict how you will fare or whether you'll enjoy the business, but you need to know the mood of the existing owners before you join their club.

Make sure you visit franchisees at a good time of day. If you show up at a fast-food restaurant at noon, don't expect to get anyone's full attention. By all means, arrive at noon, watch the operation during the lunch hour, and arrange to see the owner later that afternoon, when things quiet down.

Use the visit to follow up on the information you read in the UFOC. As lengthy as that document is, it still doesn't tell the whole story. You have to piece that together for yourself. Bring a list of questions when you visit franchise owners. Some questions you may want to ask include:

Was the training the franchisor offered helpful in getting the business off the ground?

Since running a franchise involves an ongoing relationship with the franchisor, be sure to get details on the purchasing process-everything that happened from the day the franchisee signed the agreement to the end of the first year in business. Did the parent company follow through on its promises?

Don't hesitate to ask about sensitive topics. One of the most important questions a prospective franchisee should ask, but rarely does, is "What conflicts do you have with the franchisor?" Even established, successful companies have conflicts. What you need to find out is how widespread and common those conflicts are.

Talking to franchisees can also give you something you won't get anywhere else: a feeling for what it's like to run this business day to day. Thinking solely in economic terms is a mistake if you end up with a franchise that doesn't suit your lifestyle or self-image. When you envision running a restaurant franchise, for instance, you may be thinking of all the money you're going to make. Talking to franchisees can bring you back to reality--which is a lot more likely to involve manning a fry station, disciplining teenage employees and working late hours than cruising around in your Ferrari. Many franchisees and franchising experts say there's no better way to cap off your research than by spending time in a franchise location to see what your life will be like if you buy. Buyers should spend at least one week working in a unit. This is the best way for the franchisor and franchisee to evaluate each other. Offer to work for free. If the franchisor doesn't want you to, you should be skeptical about the investment.

When all your research is completed, the choice between two equally sound franchises often comes down to your gut instinct. That's why talking to franchisees and visiting locations is so important in the selection process.

Finance Your Franchise

You've read the literature, done your due diligence, considered the statistics on success, and know a franchise is the way you want to get into business. But before you sign on the dotted line, answer this question first: Where will you get the money to finance the franchise, royalty fees, inventory and working capital?

The first thing you want to do before approaching any lender is determine what your net worth is. To do this, use a personal balance sheet to list both your assets (what you own) and liabilities (what you owe). Under assets, list all your holdings--cash on hand, checking accounts, savings accounts, real estate (current market value), automobiles (whether paid off or not), bonds, securities, insurance cash values and other assets--then total them up.

The second part of the balance sheet is liabilities. Follow the same steps. List your current bills, all your charges, your home mortgage, auto loans, finance company loans and so on. Subtract your liabilities from your assets. Once you've worked up this sheet, take a good look at your credit rating. There are three common ingredients that all potential lenders look for in a credit rating: stability, income and track record.

Most lenders are interested in how long you've been at a certain job or lived in the same location, and whether you have a record of finishing what you start. If your past record doesn't show a history of stability, then be prepared with good explanations. Not only is the amount of income you earn important but so is your ability to live within that income. Some people earn $100,000 a year and still can't pay their debts, while others budget nicely on $20,000 a year.

Most lending institutions look at your income and the way you live within that income for one very good reason. If you can't manage personal finances, the odds against you being able to manage your business finances are very good.

The third element lenders look for is your track record--how successful you've been in paying off past obligations. If you have a record of delinquent payments, repossessions and so on, you should get these squared away before asking for a loan. Most lenders will contact a credit bureau to look at your credit file. We suggest you do the same thing before you try to borrow. Under the law, credit bureaus are required to give you all the information they have on file about your credit history. Once you have this tool, you should correct any wrong information or at least make sure your side of the story is on record. For instance, a 90-day delinquency would look bad, but if that 90-day delinquency was caused by being laid off or by illness, then that should be taken into consideration.

After you've determined your net worth and your credit rating, the final step to take before approaching lenders is putting together your business plan. A well-thought-out business plan can make the difference between having your loan application accepted or rejected. A complete business plan should always include an intimate, technical study of the business you plan to go into; accurate pro formas, projections and cost analyses; estimates of working capital; an indication of your "people skills"; and a suitable marketing plan. It should also include certified statements of your net worth and several credit references.

If you're unfamiliar with writing a business plan, seek professional guidance or check out business plan preparation software such as Business Plan Pro, or BizPlan Builder Interactive.

Traditionally, the first place franchisees turn for financing is the franchisor. Almost all U.S. franchisors provide debt financing only. Some carry the entire loan or a fraction thereof through their own finance company. We found fractions of 15 percent, 20 percent and 25 percent, all the way up to 75 percent of the total debt burden. The franchisors we talked to emphasized that these figures are simply guidelines and not hard and fast limits.

In addition, the loans made by the franchisor can be structured a number of ways. Some offer loans based on simple interest, no principal, and a balloon payment that's due five or 10 years down the road. Others offer loans with no payment due until after the first year.

Instead of financing the entire start-up cost, franchisors may offer financing for portions of the entire cost. They may have financing plans for equipment, the franchise fee, operational costs or any combination thereof.

In addition to financing a portion of the start-up cost, the franchisor usually has made arrangements with leasing companies to lease the franchisee the equipment necessary to run the franchise. This can be a significant part of the financing, since equipment often makes up between 25 and 75 percent of a franchise's total start-up costs.

If the franchise you're considering doesn't offer equipment leasing, look into non-franchise, non-bank companies that specialize in equipment leasing for franchises. These types of financing companies will often provide asset-based lending to finance franchisees' furniture, equipment, signs and fixtures, and will allow franchisees to purchase the equipment at the end of the lease. Keep in mind that you may lose some tax advantages under the current law if you lease that equipment.

Remember that a business is franchised for two reasons: to expand the business and to raise capital. So if you have a reasonably good credit record and pass all the financial requirements, most franchisors will bend over backwards to get you on the team. The help that franchisors provide to help you get financing usually includes assistance with business plans and introductions to lending sources. In many cases, franchisors serve as guarantors of loans you take out.

After you've determined the extent of financing available from the franchisor, make a working list of all other available sources of capital. Most sharp operators use the following sequence of contacts: friends and relatives, home mortgages, veterans' loans, bank loans, SBA loans and finance companies.

Often, banks that aren't willing to work with you based on your financial profile become more amenable if you suggest working with an SBA loan guarantee; these loans are guaranteed up to 90 percent by the SBA. Small businesses simply submit a loan application to the lender for initial review, and if the lender finds the application acceptable, it forwards the application and its credit analysis to the nearest SBA office. After SBA approval, the lender closes the loan and disburses the funds; the borrower makes loan payments to the lender.

Recently, franchisors report being approached by financial brokers--historically more interested in big deals--to put together large pools of money using SBA and private funds. These funds would be available to franchisees through the franchisors like a trust fund. Groups of smaller banks with funds to invest would contribute to the fund from allover the country.

Other options would be to take out a home-equity line of credit or a second mortgage on your home. Be careful when utilizing this type of financing, however. The home-equity line of credit and a second mortgage are secured by your home. If you can't repay the amount you finance using this source, you risk losing your home. You can also use assets such as stocks, bonds, and mutual funds to secure a loan as long as they're not part of a qualified plan like an IRA profit-sharing plan. Also, if you are over age 59 and have a lot of money tied up in an IRA, you could use it for part of your financing requirements. Although you'll have to pay taxes on the amount used, not to mention suffer the loss of income from interest, it can be a good financing tool. If you are under age 59 and your IRA is one of your largest assets, you still may be able to take advantage of this avenue without accruing the 10-percent penalty associated with early withdrawal. By taking Substantial Equal Periodic Payments spread over a minimum of five years, based on your life expectancy, and a set of annuity tables published by the IRS, you can eliminate the 10-percent penalty, although the money is still taxable.

There are infinite sources of financing available to help you launch the franchise of your dreams. However, operating a franchise with no reserves and blinding yourself to unexpected business problems can lead to disaster. A good rule to remember: Never invest more than 75 percent of your cash reserves. If you have $10,000, invest $7,500. If you have $25,000, invest $18,750.

More important, remember that the price of a franchise doesn't always reflect the actual cost of the business itself. Additional costs can include down payments on the land, building, equipment, fixtures and signs, and can cover inventory, leasehold improvements, training, opening promotional costs, administrative costs and even sales commissions.

Be sure you understand the requirements of your cash investment. You will need a "pillow" of working capital to properly guide the business through its ups and downs. If you do your homework thoroughly, and remember that financing a business is the most important sale you'll ever make, then you'll be head and shoulders above the competition.

1. Talk to your franchisor before searching for outside financing; get approved or pre-qualified.
2. The most common source of start-up capital is friends and family. Use them.
3. Seek out lenders that understand not just small business but franchising as well.
4. Be totally honest and upfront with lenders. Hide nothing. Be prepared to explain everything.
5. Neatness counts. Fill out your credit and loan applications clearly. Typed is better.
6. Don't weigh down your loan application with attached documents.
7. Don't exhaust your liquidity by paying off outstanding debts before filing a loan application. Lenders want you to have capital available.
8. If you lack liquidity, find a partner with money.
9. Consider equipment leasing to conserve start-up capital and improve the appearance of your balance sheet.
10. Keep debts and expenses to a minimum. Many business owners take on too much debt, forgetting that cash flow must pay that debt.
11. Consider buying used equipment, furniture, vehicles, etc.
12. Let your fingers do the walking on the Internet before wasting time, energy, gas and phone calls. You'll find useful information. Some sites even allow you to file loan applications online.
13. Don't overlook angel investors and venture capitalists. Many have cooled to the high-tech sector and are seeking alternative investments.
14. Avoid dipping into your retirement money or your kids' college funds. Any start-up-even a franchise-is a risk.
15. Don't give up.