When aspiring business owners take the step to buy a franchise, they become investors.
The basic definition of an investor is: “any person or other entity…who commits capital with the expectation of receiving financial returns.” (Investopedia).
While the cost of buying a franchise varies widely depending on the industry, prospective franchisees must find a way to fund their purchase. They will also need to meet specific liquid capital and net worth requirements. There are various options to obtain sufficient capital including: using your savings, mortgaging your home, acquiring a private loan, applying for an SBA loan, seeking out an angel investor, and more.
An angel investor “provides initial seed money for startup businesses, usually in exchange for ownership equity in the company…Angel investors aren’t usually in the loan business. They’re putting money into an idea they like, with the expectation of a reward only if and when the business takes off” (Investopedia).
Therefore, a franchise angel investor is an individual or an organization that provides the necessary capital for someone to buy a franchise. The money given is an investment, not a loan, which means the angel investor will own a part of the business with the intent of seeing a return on investment. Consequently, this partnership is not purely financial. The angel investor will also play an advisory role to the franchisee to help the initial and ongoing success of the business.
5 Characteristics of Angel Investing
Angel investors are often attracted to well-managed startups in sectors such as technology, biotech, and real estate. Franchises also present a promising opportunity to angel investors due to their success rates. Franchising offers a business model that has already been proven to succeed, making it a less risky path to business ownership. Potential franchisees often just need sufficient capital to get started, which is where an angel investment can produce a win-win partnership.
Angel investing will often include the following characteristics:
- Diversification – Angel investors can spread their investments across multiple franchises. Again, a franchise’s business model lowers the risk of investment, but being able to invest in multiple franchises across various sectors reduces the risk of investment even further while diversifying their portfolio.
- Professional Management – Angel investors often invest in industries they have experience in, which makes their advisory role uniquely valuable to the franchisee. Additionally, investors gain the experience and support of the franchisor when investing in a franchise (franchisors also provide essential training and support to their franchisees). This team of franchise experts increases the investor’s confidence in the success of the business. Of course, it’s important for angel investors to select a franchise with leaders that align with their vision.
- Risk Management – Angel investors won’t simply invest in every franchise opportunity that comes their way. Instead, they will evaluate each one carefully in order to identify potential challenges and take steps to mitigate them. Since angel investing can be a risky venture, they will want to see the potential for a strong return on investment. In addition to speaking with other franchisees, Item 19 in the Franchise Disclosure Document (FDD) provides helpful insights on the returns an angel investor can expect. Check out The Importance of the Item 19 in the Decision Making Process for more information on this.
- Expertise and Support – Angel investors often invest in industries they have experience in, which makes their advisory role uniquely valuable to the franchisee. Since they are financially invested in the business, they will want to provide mentorship and operational assistance in order to enhance the franchisee’s success and growth.
- Exit Strategy – While investing in a business is often a long-term strategy that requires patience, angel investors will still want to see an exit strategy. Exit options, such as selling franchise units, is one way to maximize the return on investment.
Looking for Funding to Buy a Franchise?
Are you hoping to buy a franchise but not sure how you’re going to finance it? Fortunately, there are options! Whether it be an angel investor or a business loan, FranNet can help you evaluate your funding options. Our expert franchise consultants will guide you through the financing process as well as match you with a franchise that’s right for you. All of this comes at no cost to you! Schedule your free consultation today to get started.
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