Recently, I read an article entitled "Franchisees still contending with a lack of financing" by Danielle Douglas, from the Washington Post. Here are my thoughts about "new location" franchise units:

"Having been a business broker for 25 years, I must admit that I have a bias against "new location" franchise units where there is no operating history that can be analyzed. This is one of the reasons that lenders are hesitant to make a loan to a new franchisee. It's entirely different when a lender can analyze 3 years of operating results and evaluate the performance of the business and it's ability to pay back a loan. Too often new franchisees get caught up in the "promise of riches" put forth by the franchiser. But after 12 months or less, the reality sets in when the six figure income does not materialize as anticipated. I do like the idea of working with equipment vendors and deferring royalties and/or part of the franchise fee."

Loren Marc Schmerler,CPC, APC has been a business consultant since 1970 and a business broker since 1986. He has experience in more than 200 businesses and/or industries and has been a speaker for INC. Magazine, BellSouth, STAPLES, multiple Chambers of Commerce and multiple Continuing Education Programs.

Below is the article or click here to link over to Washington Post>>

Franchisees still contending with a lack of financing
By Danielle Douglas, Sunday, April , 6:02 PM

A dearth of available capital, despite the improving economy, is hampering franchise growth amid increased business demand, according to the International Franchise Association.

The industry trade group is part of a coalition, including the Consumer Bankers Association and commercial lender CIT Group, hosting the Small Business Lending Summit on April 7 at the Capital Hilton Hotel in the District. The event aims to bridge the disconnect through sessions highlighting the low-risk profile of franchising, best practices in loan underwriting and legislative policies that can aid small businesses.

Borrowers are having a hard time securing home equity loans, a traditional source of funding for franchisees,­ or putting up commercial assets as collateral in the face of depressed real estate values. Meanwhile, lenders say there is a paucity of credit-worthy applicants.

“Make no mistake about it, we have tightened up our standards on the bank side because of the economic downturn,” said Richard Hunt, president of the Consumer Bankers Association, who said his members are eager to find ways at the summit to support franchisees. “We want to make loans . . . people are just not as credit worthy as they were three years ago.”

John Reynolds, president of the IFA Educational Foundation, suggests lenders are often unaware of the attributes of franchising — performance history, scalability, brand strength — that mitigate risks and increase loan success rates.

“Banks are still operating in a highly risk averse climate, and anything that can be done to show them how many franchise businesses represent a lower risk profile will be good for . . . lenders, franchisers and franchisees,” he said.

A report released last month by FRANdata, an Arlington-based research company, estimated that available credit may be 20 percent below the $10.4 billion in new capital needed to meet the forecasted demand for franchise operations this year. That margin is an improvement from the 23 percent gap in 2010, a result, in part, to the increase in Small Business Administration loan guarantees.

“If we can unlock this credit freeze and get lending flowing to franchise businesses, we can have the same kind of robust recovery we’ve had leading out of past recessions,” said Reynolds.

Even with the bleak lending outlook, PricewaterhouseCoopers anticipates the addition of 19,079 franchise units this year, creating 194,000 new jobs and generating $33.3 billion in economic output — the gross value of the goods and services a business produces. The consulting firm attributes the projected growth largely to the $858 billion tax and unemployment benefits package, with its payroll tax rate cut.

Judging by the thousands of attendees registered for this past weekend’s annual International Franchise Expo at the Walter E. Washington Convention Center, Thomas Portesy, president of MFV Expositions, producers of the show, is convinced the industry is on an upswing. More than 200 exhibitors signed up for the show, up from 180 the previous year.

Of the exhibitors on display, more than 20 provided or advised on financing options. Portesy noted, however, “franchisers have solved some of the problems themselves: They’re doing some in-house financing, working with equipment manufacturers to lower costs.”

Edible Arrangements, for instance, offers a lease-to-buy program that only asks for 30 percent of start-up costs, while Dunkin Donuts has reduced some of its royalty fees to give franchisees a leg up.

Yogen Fruz, an exhibitor at the expo, does not provide seed money, but will guide entrepreneurs in finding funding. John Kane, a master franchiser for the Ontario-based frozen yogurt chain, said most franchisees he encounters are coming to the table with cash. Rustling up that kind of financing can be prohibitive for some small businesses, but Kane said it has not slowed the expansion of Yogen Fruz, which executed 14 franchise contracts last year.

One of those agreements will result in the fall opening of the first Yogen Fruz stores in Maryland, located in Westfield Annapolis Mall and Towson Town Center. Another will add two more locations in the District later this year. All told, the company has 1,200 locations in 25 countries, most of which are franchises.

Southern-style eatery Bojangles, another exhibitor at the expo, has recorded an annual 10 percent growth in units for the past three years, bringing its total franchise and company-owned stores to nearly 500. Just last week, the Charlotte, N.C., company turned on the lights at its first franchise restaurant in the District at Union Station. Five others are in Prince George’s County.

Eric Newman, executive vice president of Bojangles, said the company is focused on putting down roots in Northern Virginia, where it currently has no stores. There has been great interest from prospective franchisees, who he said have aggressively pursued the business format.

That’s exactly the kind of verve Kane believes will continue to drive the expansion of Yogen Fruz. People are eager to sign onto proven business models, he said. The trouble is, “there still hasn’t been the kind of lending that really spurred franchise growth in the past.”

douglasd@washpost.com

Recently, I read an excellent article about becoming an entrepreneur by Jeffrey Bussgang from the Harvard Business Review titled, “Should I Become an Entrepreneur?”

The article addresses many points to consider when thinking about owning your own business. This article outlines important questions to ask yourself if you are interested in taking the next step to becoming your own boss.

I offered a comment to the article about a less risky alternative than starting a business from scratch and that is to buy an existing business.

“Having been a Business Consultant for 40 years and a Business Broker for 25 years, there is a less painful way to become an entrepreneur. Buying an existing business with an established and verifiable history is superior to starting from scratch with no customer base. If the business is profitable, you can always use your creativity to tweak it to make it better.” – Submitted by Loren Marc Schmerler, CPC, APC – President and Founder of Atlanta based Bottom Line Management, Inc.

Below is the article or click here to link over to the Harvard Business Review.

Should I Become an Entrepreneur?
2:31 PM Friday January 21, 2011
by Jeffrey Bussgang

When to become an entrepreneur is a common quandary for many. For whatever reason, this issue has come up a great deal recently (recession-driven workforce dislocation?), so I thought I’d share a few thoughts that might help frame this critical decision.

I have concluded that being an entrepreneur is an irrational state of being. If human beings were purely rational, evaluative, value maximizing individuals (see HBS Prof Michael Jensen’s paper on self-interest and human behavior (link PDF)), they would not start companies. If they sat down and did the expected value calculation by laying out the probability-weighted outcomes of being an entrepreneur as compared to taking a safe job, it would not pencil out.

Yet, entrepreneurship is not simply a rational journey. It is one that is defined by passion and personal satisfaction that transcends purely financial analysis. And, of course, there is always the hope for the big payout, no matter how long the odds.

Despite popular wisdom to the contrary, age is not a major factor in the decision to start a company. The Kauffman Foundation reports that the median age of founders is 39 – right at the midpoint of a typical professional career – and 69% are 35 or older. Another study by Washington University professors of 86,000 science and engineering graduates showed that age was not a significant predictor of becoming an entrepreneur.

So when should you become an entrepreneur. Here are the kinds of questions you should ask yourself:

Do you have an idea that no one can talk you out of? When you bounce your start-up idea off your spouse, friends and trusted advisors, are they able to raise enough objections that you begin to doubt whether the idea has merit. Getting honest, objective advice can be hard because the people you are likely to go to care about you and may be afraid to tell you what they really think for fear of offending you. Thus, you need to get feedback from objective parties (e.g., advisors, experts, prospective angel or VC investors with whom you don’t have a deep personal relationship).

Do you have a partner you trust with complimentary skills? Starting a company is a lonely adventure. Having a partner that you can trust and whose skillset and experience is complimentary to yours can be a huge functional and emotional benefit.

Are you prepared to endure with modest or no salary for a few years? Founding a company often means making personal sacrifices and below-market cash compensation. All the talk about “lean start-ups” (which I’m a big fan of) sometimes obscures the practical reality of what it means to eat through your personal savings.

Are you bored with your current work environment/life situation? There is nothing boring about being an entrepreneur. More apt adjectves might include stimulating, engrossing, obsessive, exhilarating, nerve-racking – but not boring. If you are tired of viewing your work as a chore and if every day is a bit of a grind, then entrepreneurship is for you. I find that the intrinsic motivation behind an aspiring entrepreneur is sometimes the simplest – because it’s fun. Seeking fun can transcend all other factors.

Do you perform best in the absence of structure? In my book, Mastering the VC Game, I describe a metaphor for the three stages of a start-up: the jungle, the dirt road and the highway. In the earliest stages of a venture – the jungle – there are no clear paths available and the skills required are to thrive in the midst of the chaos. For those who possess that makeup, being a start-up executive is an excellent fit. But for those that like clear paths with little uncertainty and a great deal of structure – the highway – an early-stage venture will feel like a very uncomfortable environment.

Reflecting on these questions, I find it intriguing to reflect on what kind of environment – either from the perspective of parents raising their children or policy makers thinking about encouraging entrepreneurial ecosystems – can be created to foster more entrepreneurship? HBS Professor Noam Wasserman is writing a book called Founding Dilemmas which is coming out later this year (I’ve read early drafts and believe it will be a must-read for entrepreneurs). In it, he quotes career guru Dr. Tim Butler who points out that signals from parents, mentors and local leaders have a large influence on whether people chose to become entrepreneurs. “We receive very powerful messages [from those around us] about what’s important, what success is, what failure is, what counts for achievement and what doesn’t. ”

Celebrating entrepreneurial success stories in our culture and putting folks like Steve Jobs, Bill Gates, Larry Page (the new Google CEO!) and even more accessible, local heroes on magazine covers and in front of audiences is obviously a huge factor. Every college kid in America looks at Mark Zuckerburg and thinks, “Why not me?” Why not, indeed?

Jeff Bussgang is a general partner at Flybridge Capital and an Entrepreneur in Residence at Harvard Business School. He is author of the book, Mastering the VC Game.This post originally appeared on Jeff’s blog, Seeing Both Sides