Many emerging entrepreneurs set their sights on owning a franchise, because the business model is about as “turn key” as one can get. Branding, operations, and a support network are already in place, and the franchise model has been honed to a science for financial success. Rather than starting from scratch, many people look at buying existing franchises. However, purchasing an existing operation can often cost more money than most people have on hand, which is why they turn to acquisition financing to get the capital they need.
Types Of Acquisition Financing
There is no one way to go about purchasing an existing franchise, so we have compiled a general overview of the various solutions to get the working capital you need.
Sometimes, the best alternative to a traditional bank loan is to get financing based on the assets a business has. Asset-based financing gives business owners the funding they need based on the value of things such as equipment, property, and receivables. This acts as a line of revolving credit that entrepreneurs can leverage to purchase existing franchises. Unlike bank loans, this type of acquisition financing can be arranged quickly and does not register as debt on the balance sheet.
Mezzanine lending has risen in popularity over the past few years because of how quickly it can be processed by the commercial financing company, allowing entrepreneurs to act on time-sensitive opportunities. For franchise acquisition financing, mezzanine lending uses the franchise itself as collateral against the funds. Mezzanine agreements have slightly higher rates than bank loans (due to the fast processing, and because the lender is taking a risk on the future of the franchise), but financing sources typically work with entrepreneurs to ensure the success of the business. The big caveat with this type of acquisition financing is that if the business owner cannot repay the funds, the mezzanine lender takes ownership of the franchise.
Seller Carry-Back Acquisition Financing
Every once in awhile, a relationship can be built between the franchise owner and the buyer. From this, an agreement is arranged whereby the seller finances the acquisition of the franchise. This type of acquisition financing typically uses an intermediary to draw up the agreement and go over the terms with both parties. This has the added advantage of ownership transition, because the seller can help the franchise transition to the new owner and ensure the continuing success of the operation.