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Log In / Register | Apr 19, 2014

Franchise Loans Difficult to Get

Rick Kimsey, a twenty year veteran of the wireless telephone industry, decided he wanted to leave the increasingly competitive market of cell phones and invest where the grass looks greener - health care.  He observed that health care was among the fastest growing industries and concluded that buying a Doctors Express urgent care was the way to take advantage of that growth. Buying a franchise made sense because the franchisor would train him on how to build and run a business that he knew little about.

Few understand what makes a franchise concept franchisable -- e.g. Why does a sandwich shop lend itself to franchising while dentistry does not? Why is an Internet business poor for franchising while oil change is better? And even fewer buyers would be able to guess when a franchisor is in fertile grounds for franchising and when the franchisor is ripe for failure. [Franchise leaders, consultants and experts should read Prof. Scott Shane's book From Ice Cream to the Internet: Using Franchising to Drive the Growth and Profits of Your Company for what makes a company franchisable.]

Joyce M. Rosenberg of the Associated Press reports Kimsey recalling the difficulty in obtaining funding for his franchise outlet:

“It’s a franchise concept where you don’t have to be a doctor to own it. It’s outside their [bankers'] thinking,” he says. The banks liked his business plan, but bank officers told him that because he wasn’t a doctor, “that’s going to be a problem.”

It took Kimsey a year to find a banker to fund the risky venture. Bankers were wise to the double risk of not only an unproven segment of urgent care to franchising but also a new franchise brand, especially in this economy. So the government stepped in to help loosen the credit crunch.

....Eventually Kimsey did get a $575,000 Small Business Administration-guaranteed loan from a bank in Utah. He tapped into his savings and about $500,000 from his 401(k) – the entire account – for the rest of the money.

Essentially, Kimsey bet it all on the farm franchise.

Some advocate more government aid in the face of  lower lending by the private sector.

“Where it’s really having its hardest effect is the aspiring entrepreneur who doesn’t have that track record or that relationship with the banks,” says Stephen Caldeira, president of the International Franchise Association.

New franchisee Kimsey dreams of how his new Doctors Express urgent care franchise will take care of him in his latter-years and his posterity.

“I’ve got to build this up. It will be my retirement,” Kimsey says of his franchise. “Then I’ll hand it over to my children.”

That's unlikely. Franchisors have a "right of first refusal" to franchises being passed down. Franchisors are also disincentivized to do so since they receive full franchise fees when they resell a franchise to new buyers and new blood. The right of a franchise owner to pass down his business to posterity is so rare that one group of franchise owners from some of America's largest brands created a universal franchise bill of rights to push for it.

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