The question Matt and Rick discuss this week is how do you find the best (and worst) ways for franchise funding in the fitness industry.
The most common reason that businesses fail is inadequate capital. So where do you find the money to fund a business?
Did you know that you are several times more likely to get funding if you are going for a franchise? A franchise is a proven concept, and financiers know that you are more likely to succeed in a franchise than when you are on your own. One thing that makes franchising more successful is we have financial qualifications for investors before they can buy a franchise. Now, why do we do that? Statistically speaking, franchises are some seven times more likely to survive than independent businesses. This is because many people get into a business and they’re underfunded. They just don’t have enough money to last. Many new businesses don’t have a solid business plan much less a plan to presale memberships or growth strategy.
With the Alloy franchise model, we have a business plan, growth strategies and a presale plan before you even open the doors. We start with the financial qualification to ensure you have adequate money to open and operate your franchise. This is based on new worth with a certain percentage of liquidity. That means that you have amassed some wealth and that you’ve made good financial decisions, with a little staying power. So you’re way more likely to succeed if you have these ducks in a row. So we’ll start with that.
So if you are thinking about opening an independent gym, as opposed to a fitness franchise, I would say if you are not at that threshold, then you probably should reconsider until you amass enough wealth to have staying power.
3 Franchise Funding Ideas For A Fitness Business
1. Personal Funding
So this would be if you’ve just saved up enough money to go “all in” on this new business venture. That’s what a lot of independent entrepreneurs do, but that’s not the most savvy way to go about funding a business because cash is king. If you can use someone else’s cash to open your business, that’s the way to do it. Right? You wouldn’t want to spend all the money that you have in the bank to fund the business. Now, if you’re wildly successful, and you have a ton of cash reserves, then absolutely use your cash for funding. There’s no reason especially now when interest rates are really low – why wouldn’t you borrow money at a really low rate to then have an investment opportunity that’s going to give you return at a much greater rate.
Another way of personal funding would be to get an investor, if you don’t meet the financial thresholds. If you are a fitness industry expert and you have a family member, friend or even a personal training client who’s going to invest in you to help you open the business. They’re taking a little bit of risk on you and they should get a return on investment. Two ways to structure this is they can act as your bank and you will pay them back with interest over a set amount of time. Or they’re going to want a piece of your business, but this is where you need to be careful because the most valuable thing that you have is equity in a business. So to just give it away, to have the opportunity to open a business you might want to rethink that.
Also, besides funding the franchise you need to fund your fitness equipment. You can do an equipment loan. There are companies that will give you a loan for that equipment, typically a three year lease with a $1 buyout. The tax strategy makes it easy to depreciate it and at the end of the lease, you own it. So that all falls under the umbrella of personal funding.
2. Small Business Association (SBA) Loan
To get a SBA loan you will need to financially qualify, which you’re going to have to do the Alloy Franchise anyway. Franchising is also more advantageous in this case because the SBA understands the power of franchising and the success rate of a proven concept. Alloy is an SBA approved franchise. When you get an SBA loan, you’re still going to need to cash flow about 20% of that. The SBA wants to see that you’re invested in the investment.
You could just take out just a regular personal loan as compared to a SBA loan, but that’s not as advantageous. With a personal loan there’s really no barrier between you and the personal loan. So let’s just say you want to go to the bank and just take out a loan. You’re typically putting up a lot of things against that personal loan, but with a SBA loan there’s more protection. So an SBA loan is a popular and excellent option for franchise funding.
3. 401K – ROBS (Rollover for Business Startups)
Here’s the scenario. You’re working in a corporation and you’ve got a lot of money put away in your 401k. You can, without penalty, transfer that money into a C Corp. So you develop a new Corporation, you transfer the funds from one investment arm, which is a 401k, into a new investment arm, which is this new C Corp that you’ve set up. That Corporation then funds this new investment opportunity, which is the franchise. We work with a lot of companies that service franchising and they can help put all the pieces together. Typically, in the stock market you are earning 10% over the long haul. So you can pull that out and put it into this franchise opportunity over here, typically earning a much better return on investment.
Tune in to this episode to learn the advantages and disadvantages of each of these three options and the best one to go for fitness franchise funding.
- How Alloy franchisees are doing (00:24)
- Why getting funding for a franchise is easier (04:07)
- Personally funding your fitness business (06:14)
- Finding an investor to fund your business (08:04)
- SBA loan – Alloy is an SBA approved franchise (10:00)
- How you can use your 401K (without penalties) to fund a startup (11:54)
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