Considering a family investment when starting a franchise
Joel Caws - Technical Director, Select Your Franchise
If you are considering starting up a franchise business, sooner or later you will come up against the issue of finding money to finance it. Most franchises require payment of a franchise fee which covers the cost of the proven franchise system, training and support and, if required, initial startup stock or materials. In addition, there will also be other general business start up costs which might include transport, office and office equipment, communications services, etc.
Of course there are a number of ways to obtain the required funding for a new business. The high street banks are an obvious choice or you might already have some of your own cash saved up that you would be willing to invest.
Obtaining investment from one or more family members, has become an increasingly popular option. It can seem like the ideal scenario to ‘keep it all in the family’, however its worth giving some thought before venturing down that path to ensure it doesn’t cause the family grief later.
Clarity from the start will be the most important aspect; to ensure that all family members are fully aware off what risks are associated with the money they are putting in and what outcomes could be expected. It’s also critical to ensure no family members feel taken advantage of or that it doesn’t cause unnecessary friction between family members should things not go as expected.
While you might not feel it necessary to have a full blown legal contract or terms (although you might consider this as an option depending on family relationships and circumstances), it is certainly prudent to ensure the basics are in writing so everyone has seen, understands and agrees to it. You might consider including:-
- The terms on which the finance is put into the franchise business: i.e. is it simply a loan to be paid back? Or does the family member lending the finance receive an interest or shares in the business in proportion to their investment?
- What timescale do you anticipate the finance will be needed for? When and in what amounts will it be paid back (if applicable)? What happens if the business cannot pay it back?
- What happens if one family member lending finance needs it back earlier than expected?
- Will you offer a personal guarantee to ensure the finance will be paid back even if the franchise business does not succeed?
- What happens if the business fails?
These are just a few common-sense things to write down and agree between the family members involved in investing in the franchise business. The temptation where families are concerned is to simply rely on informal unwritten trust and word of mouth which, may for many, present no problem. I’d suggest though that having a basic written agreement that everyone has read and understands could save alot of heartache and just simply makes good sense.
Have you borrowed money from family in order to fund a business venture? I’d be interested to hear about your experiences as well as other thoughts and comments on the subject.
Tags: Franchise Finance, franchise funding, franchise opportunities, franchise start up, joel caws
