Business Franchise

Dumouchel, J. Robert. Government Assistance Almanac. Detroit: Omnigraphics, Inc.

Edwards, Charles J. and James V. Shuster, eds. Guide to Federal Funding for Governments and

Nonprofits, 2 vols. Arlington, VA: Government Information Services.

Federal Register. Washington, D.C.: U.S. Office of the Federal Register, National Archives and Records Administration.

U.S. Office of Management and Budget. Catalog of Federal Domestic Assistance. Washington, D.C.: U.S. Government Printing Office.

Keep in mind: Lack of good information is one obstacle to finding the right government funding agency. There may be a great deal of information on federal funding programs, but much of it is confusing and contradictory. Call the agency in question before applying for government funding in order to obtain the most up-to-date information on the program.

Bergan, Helen. Where the Money Is: A Fund Raiser’s Guide to the Rich. Alexandria, VA: BioGuide Press.

BoardLink [CD-ROM]. Detroit: The Taft Group.

Glynn, Jeanette. Who Knows Who: Networking Through Corporate Boards. Berkeley, CA: Who Knows Who Publishers.

Index to Marquis Who’s Who Publications. New Providence, NJ: Reed Reference Publishing.

Reference Book of Corporate Management. Bethlehem, PA: Dun & Bradstreet Corporation.

Social Register. New York: Social Register Association.

Standard & Poor’s Register of Corporations, Directors and Executives, Vol. 2. New York: Standard & Poor’s.

Who’s Who in America. New Providence, NJ: Reed Reference Publishing.

 If the individual you are researching is not connected to a foundation, you may still be able to find information regarding his or her personal wealth, corporate interests, or charitable donations by referring to the resources listed above. A number of online databases provide extensive biographical information. You can access these with your personal computer and modem, or inquire whether the library you are using performs computer searches for patrons.

Corporate 500: The Directory of Corporate Philanthropy. San Francisco: datarex corporation [sic].

Corporate Foundation Profiles. New York: The Foundation Center.

Corporate Giving Directory. Detroit: The Taft Group.

Directory of International Corporate Giving in America and Abroad. Detroit: The Taft Group.

National Directory of Corporate Giving. New York: The Foundation Center.

National Directory of Corporate Public Affairs. Washington, D.C.: Columbia Books, Inc.

Keep in mind: Corporations may give by means of a company-sponsored foundation (in which case they file Form 990-PF, as other private foundations do) or by means of a separate corporate giving program (in which case it may be more difficult to get information), or both.

 Corporate giving is almost always limited to programs of benefit to employees, their families, or residents of specific locations where the company conducts business. Geography plays a significant role in corporate grantmaking. Employee matching gift programs are increasingly common vehicles for giving.

 Cash donations are not the only type of corporate support. Ask yourself: Can the project be handled as a business expense rather than a grant? Would in-kind support such as the donation of equipment, use of corporate facilities, printing, design services, or access to executive expertise be helpful to my nonprofit organization?

When approaching corporate grantmakers, always consider the self-interest of the funder. A proposal to a corporation should emphasize how its support of your project will help it achieve its goals.

 Corporate Philanthropy Report and Corporate Giving Watch are two useful periodicals for keeping up to date on corporate giving.

If you want to change the world around you and think about non-for profit franchise than common sources of financing are not for you. I hope the following information will be useful:

Explore the Internet to learn about the many fundraising resources accessible there. Some of these include nonprofit organization Web sites, discussion lists, and newsgroups. Although locating information on the Web can be daunting at first, there are many helpful resources.  Here are a few:

 www.fdncenter.org

The Foundation Center

www.philanthropy.org

The Chronicle of Philanthropy

www.nsfre.org

The Association of Fundraising Professionals (AFP)

www.idealist.org

Actions without Borders

www.resource-alliance.org

The Resource Alliance

Starting your business while singing a franchise agreement has many advantages over starting a company yourself. It is easier, it takes less time and you can get help and support from more experienced partner (the main company). But not so many people decide to buy a franchise license. I think that one of the main reasons for this is initial fee that a potential franchisee needs to pay to franchisor.
Today I want to say a few words expressing my opinion regarding why the franchise fee is so high. My observations are based on the following statistics given by the leaders of some franchises:
“Ron Eriksen, the vice president of market development for the Baby’s Room USA Inc., Elmhurst, Ill., provides the following facts: last year the company sends out 775 four-color brochures by Priority Mail costs $14. Only 6 percent of those recipients sent back a preliminary application form; 1.8 percent of the 775 became new Baby’s Room franchisees”.
My calculations and comments:
It means that the company spent $10,850 only for colorful brochures and received only 14 new franchisees (775 requests multiplied by 1.8 percent). So only to get the money back the Baby’s Room USA Inc. has to increase the franchise fee by $775. Is it fair? Maybe franchisee will say no because nobody wants to pay for the others who decided not to become franchisees of that company. But it’s absolutely fair from franchisors point of view.

“Steven Romaniello, president and chief operating officer of US Franchise Systems Inc., in Atlanta, says that his hotel company spends $50,000 on promotion and recruitment efforts for each franchisee who eventually buys a Days Inn, Microtel or Hawthorn Suites franchise”.
No comments needed. Even if franchisor decides to cover a part of this sum himself (let’s say 50 percent) the other part has to be included into the initial fee. The other part will be received by franchisor later in the form of royalty payments. By the way this can explain why sometimes royalty is greater than the cost of current support provided to franchisee: franchisor tries to cover some earlier expenditures.
Greg Longe, president of the Molly Maid and Mr. Handyman franchise systems in Ann Arbor, Mich., says, “Our Internet leads are way up this year, but all that means is that we have to do a lot more work to generate a solid candidate. Most of the people we’re hearing from aren’t qualified to run our concept.”
My comments:
When he says “a lot more work to generate a solid candidate” he speaks about people who will do this work. Company needs to hire qualified manager (or even managers) to deal to convert at least some of the leads to new franchisees. Company bears the costs of salary, Internet and phone communications, and many others dedicated to manager’s work. And as every cost it will increase the final price. In our case it will increase the initial fee in the start-up period or royalty during the operational period.

And initial fee includes not only advertising and recruitment costs. In most cases the main company provides training for the chief manager or key personnel of new franchisee. To do this they need to pay to trainers, to buy some stuff (like materials, paper and so on)…
Thinking about all that things I came to the conclusion that low initial franchise fee can be a bad sign (not “is” but “can be”). Certainly it depends on business sphere and region or country. But at least it’s a point to think over one more time whether to sing a franchise agreement with a company that sells its idea for the price that doesn’t cover the costs. It may seem strange…

Usually people finance their franchise business from different sources. Applying to the SBA (Small Business Administration – one of the main government agencies supporting small business) you can avoid that rule. They finance or guaranty only if the prospective owner also invests his personal money.
 So this rule limits the opportunity to get a credit financing on the one hand. But on the other hand it helps the prospective franchisee to choose what expenses to cover himself and what to finance on a credit basis. Let’s distinguish the eligible and non-eligible purposes according to the SBA.
 

“Good” purposes
1. Capital investment
Capital investment is rather broad concept and can include (but not only) the following:
-to purchase land or buildings,
-to cover new construction as well as expansion or conversion of existing facilities;
-to acquire equipment, machinery, furniture, fixtures, supplies, or materials for construction;
2. Operational financing
Operational financing is used for current business purposes like buying raw materials and inventory, paying of accounts payable, seasonal financing, contract performance, construction financing, export production, and for financing against existing inventory and receivable under special conditions and so on.
3. Buying somebody’s business (no comments)
  “Bad” purposes
1. Financial transactions
Like in the situation with capital investment this purpose is very broad one and may include:
- refinancing existing debt (especially in the situation when company had no sources to pay it back and these sources don’t appear after refinancing);
- financing change in ownership or part of the ownership;
- repaying delinquent state or federal withholding taxes or other funds that should be held in trust or escrow.
2. Non sound business purpose (for the SBA)
 The last thing to say: even if your business meets all of these criteria it doesn’t guaranty that you will get the money. Unfortunately…

The first thing to think about is type of business. When they say “TYPE of BUSINESS” they mean a lot of different factors.
On the one hand they say that almost every small business company can apply for the SBA loan. On the other they carefully evaluate the company’s current and prospective activity. The general evaluation criteria include:
-to be the US resident;
-to get financial resources from other sources too, including personal savings;
-to operate for profit (the SBA does not work with charitable, religious, or other non-profit or eleemosynary institutions, government-owned corporations, consumer and marketing cooperatives, and churches and organizations promoting religious objectives)
 
What about franchises? They are eligible but only if franchisee makes financial decisions independently (the situation when franchisor deals with accounting and financial management is the first sign that franchisee will not get financing or guaranty from the SBA).
 
Speaking about business sphere I need to say that they can be divided into 3 groups:
I. Completely eligible (those not included into groups II and III)
 
II. Eligible with some limitations or restrictions
1. Businesses in agricultural sphere and farms. They can get financing and guaranty from the SBA but government wants them to turn to the Farm Service Agency (FSA) and check their financing and supporting programs first. It’s rather logical, I think…
2. Business in fishing sphere. It’s the same situation as in agricultural sphere. Government wants them to contact their specialized organization first - the National Marine Fisheries Service (NMFS), a part of the Department of Commerce.
3. Businesses in medical sphere (hospitals, clinics, emergency outpatient facilities, and medical and dental laboratories, convalescent and nursing homes). They are eligible if they have a proper medical license from the appropriate government agency.
 
III. Not eligible business.
There are some business spheres that are not supported by government programs in general and by the SBA program in particular. But I need to say that in my mind they are not associated with franchise business (maybe except some spheres in gambling…). They are:
1. Any form of illegal business (no comments)
2. Real estate investment. As I understand it doesn’t mean that government dislike that form of business or consider it something worthless. It’s rather reasonable as investment business consider real estate as a something short-term, as the object of business, but not capital or factor of production. And it conflicts with the main idea of small-business loan programs of the SBA – to help buying long-term assets to be used in production of goods or providing services.
3. The same relations exist toward other speculating activities (firms getting profits from fluctuations in price rather than through the normal course of trade). Also I can state that such types of business is too risky for the government as I think…
4. The companies that do not produce goods or provide services (companies dealing with money – financial institutions, banks, insurance companies on the one hand and gambling companies like casinos on the other). I think that they can easily survive without government support …
 
What else do you need to consider in order to become eligible for the SBA programs except types of business? You need to present for what purposes you are going to use that money. Read my next article to learn what purposes are OK and what are not…

When a person starts his own business trying to realize the dream of the whole life usually it has little in common with a franchise business. I mean that in most cases people don’t dream about buying somebody’s idea but want to do something invented personally. So in this situation the prospective businessman usually follows these steps (generalized plan):
1. Create a business plan (including all necessary pre-researches)
2. Calculate the necessary investment
3. Evaluate personal savings
4. Turn for a credit
5. Start a company
 
But when you are buying a franchise you may have two variants of behavior to choose from. Just think this over! If you don’t have a special franchise preference (maybe your friend’s or your relative’s one) you can choose an idea that has the best opportunities to get external financing. In this case your strategy can be something like this:
1. Compare different credit programs (provided by banks, business associations, other financial institutions) and write the list of eligibility criteria.
2. Choose the franchise idea according to those eligibility criteria.
3. Create a business plan (including all necessary pre-researches)
4. Turn for a credit
5. Start a company
 
As I understand in the second variant you have much better opportunities to be financed externally, to start your business faster and to take a loan with lower interest rate and better other conditions. It seems for me that it’s worth of it.

All-Blogs.net

Another interesting program of the Small Business Administration (SBA) is called the CDC/504 loan program where “CDC” stands for the Certified Development Company. The Certified Development Company is a private nonprofit organization with the main purpose to contribute to the economic development of its community. The organization works with the SBA and privately-owned lending institutions (commercial banks and other financial organizations) to provide financing to small businesses. There are about 270 CDCs in the USA. Each CDC is responsible for a specific geographic area.
 
The main features of the loan are the following:
a) it’s a long-tern loan;
b) the interest rate is fixed during the whole period;
c) there is a limited number of purposes: to acquire real estate,  machinery or equipment for expansion or modernization;
d) in most cases the loan is secured with a senior lien (when provided by privately-owned lender) or with a junior lien (when a loan secured from a CDC and with a full SBA-guaranteed debenture);
e) the borrower has to invest himself not less then 10%.
 
How much a company can get according to this program? It depends on the purposes and job creation factor:
 
1. You will get up to $4,000,000 if you are qualified as a “Small Manufacturer”. A company is considered as small manufacture if its primary business classified in sector 31, 32, or 33 of the North American Industrial Classification System (NAICS); and all of its production facilities are located in the United States.
 
2. You will get up to $2,000,000 if your company’s activity meets at least one of the following public policy goals:
a) Business district revitalization (a strange goal as I think; different people will vary in opinion while explaining the sense of “revitalization”; I can even say that every new company revitalize a business in a district… I don’t like that factor, as it’s not clear to my opinion);
b) Expansion of exports (this factor is a wonderful public goal; every student can explain why export is important for the economy of the district and for the whole country; but one doubt appears in my mind – how will new small business company prove that they are going to expand the export; such statements are based on the international marketing research but small business company – especially a new one – has no money, specialists and other resources to get such research even for one product and for one country… But still I like that factor because it’s economically correct);
c) Expansion of minority business development (Government tries to kill two birds with one stone – to help small business and minority… I like this because it can save some budget money!);
d) Rural development (my comments are the same as to the previous factor);
e) Increasing productivity and competitiveness (oh… one more factor that would be very difficult to prove; especially competitiveness; certainly if you buy a new technology and modern equipment it WILL increase the productivity of the company; but the costs will rise and so on… I’m not sure about this factor);
f) Restructuring because of federally mandated standards or policies (it’s clear and I support this);
g) Changes necessitated by federal budget cutbacks (I like this; when new business creates new jobs in the region or solve some urgent economic or social problems it worth of receiving some support from the Government);
h) Expansion of small business concerns owned and controlled by veterans, especially service-disabled veterans (it’s easy to prove and it’s very noble goal; such people need to know that they can do something for the society, not only society for them; they have a special need to be useful; I really support that goal)
i) Expansion of small business concerns owned and controlled by women (as a woman myself I like this goal… but feminists can say that the Government offend women by this goal: why do they say that women need more help than men…)
 
3. You will get up to $1,500,000 if your project meets the job creation criteria or a community development goal. Generally, your business must create or retain one job for every $50,000 provided by the SBA.

I’m continuing describing the 7(a) Loan Guaranty by the SBA. By the way the strange name of the program is not really so strange. It comes from the legislation, the section 7(a) of the Small Business Act.
 
One of the most important things to learn about this program is guaranty itself. Who provides it? When? Are there any limitations?
1. The SBA doesn’t guaranty the full amount of 7(a) loans. The lender and the SBA share the risk that the borrower will not be able to repay the loan in full. The SBA takes the responsibility to cover the loan payments in the case of payment default. The guaranty doesn’t include imprudent decisions made by the lender or misrepresentation by the borrower.
2. The SBA provides the guaranty that is only available to the lender. It means that according to this program, the borrower remains obligated for the full loan amount due either to the bank or to the government. The program assures the lender that in the event the borrower does not repay his or her obligation and a payment default occurs, the government will reimburse the lender for its loss (up to the percentage of the SBA’s guaranty fixed in the loan agreement).
3. The SBA doesn’t provide guaranties to all small business companies. The applying company needs to understand that the Agency will check both eligibility and being creditworthy. Also they will determine if the company can prove the willingness and ability to pay its debts and whether it abided by the laws of its community. I’ll write more about the factors of eligibility later but here I need to say that any prospective borrower has to understand that the SBA takes into consideration that for some reasons commercial banks and other financial institutions are not willing to lend you money. If means that something is not so good in your idea, or you personal credit history, or something else. Maybe you may think how to improve the situation yourself at first?…
 
(to be continued)