When you want to expand your business, you evaluate possible sources of capital:
- finance the growth through personal savings and credit cards?
- apply for a government-backed (SBA) or bank loan (paying interest) as well as personal guarantees?
- solicit angel investors or use “crowdfunding” (you’d be giving up equity from the start)?
In addition to providing personal guarantees for repayment of the borrowed funds, you’ll be taking on new “landlord” obligations if there is business real estate involved, which could include negotiating leases for other properties and even personally guaranteeing the lease.
Is there another alternative? Think of becoming a franchisor, suggests business attorney Steven D. Rinaldi. Becoming a franchisor is far from obligation-free, Renaldi points out, since a would-be franchisor must create and present to the potential franchisee a 23-part franchise disclosure document using standard guidelines. Still, franchising one’s business represents a path to business growth involving much less of a financial burden.
At Geyer Legal Group, PC, we know, having helped Indiana businesses since 1999, dealing with aspects of business law including buy-sell agreements and other forms of succession planning..While we do not provide life insurance, investment, or tax advice, instead working together with our clients’ advisors to formulate plans, we often discuss business growth strategy as it impacts – and is impacted by – clients’ business succession plans.
Acknowledging the way you decide to franchise your business might impact your estate planning, Renaldi noted:
- Sole proprietors need to protect family members from inheriting business debt
- Proprietors must ensures that the obligations to franchisees are met
- A plan can provide for a successor or beneficiary to take over the business
Renaldi offered an interesting true story exemplifying the nexus between franchising and estate planning:
A physician client wanted his children to enjoy the fruits of his success in building a multi-location practice franchise. However, since not all three sons were doctors (and therefore could not own a medical practice), a managed services organization was created.
Franchising for business growth is a possible choice, designed to reduce both investment costs and the “hassle factor” of business transactions. Franchising enables you to receive an initial franchise fee from each franchisee as well as monthly royalty payments and marketing fund payments from each franchisee. Franchising can give you an income stream without interest payments, personal guarantees, or giving up equity.
But, as Nikki Roser of My First Bank points out, since many business owners have the majority of their resources invested in their company,every business decision must be made with heirs in mind.
When you decide to franchise your business, your primary business becomes running a nationwide franchised business operation, not in running your business as it existed before franchising. You have to set up policies, processes, and procedures for your franchisees to follow. You have to create an operations manual for franchisees to follow, Renaldi explains.
– by Ronnie of the Geyer Legal Group, PC blog team
Former Associate General Counsel of the American Bankers Association, Steven Rinaldi handles mergers & acquisitions, business agreements, franchising, private offerings of securities, and technology license agreements.
