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Franchising Is an Alternative to Unemployment if You Can Get Start-Up Financing

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Self-employment is an alternative to unemployment. Yet, determining what kind of business to start, knowing how much money you will need, and what steps to take can be daunting.

Franchising tries to alleviate the uncertainties by having ready answers and with a proven system in place to follow.

The franchisers tell you how much money you will need and even help you find sources to borrow a portion of it. But start-up financing for small-business owners has gotten more difficult to obtain since the financial meltdown and funding for franchises are no exception.
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For example, even franchisers of well-established franchises such as Kentucky Fried Chicken are applying to be on the U.S. Small Business Administration's Franchise Registry. It is a way of improving the probability that that its franchisees will find start-up, renovation or expansion funds.

"KFC had not previously been listed in the SBA franchise registry because our franchisees were securing financing with little difficulty," says Scott Haner, its director of franchisee recruiting. "We decided that we wanted to do whatever we could to expedite the financing process, which included pursuing a listing on the SBA Franchise Registry."

Expediting the process is the exactly what being listed the on the registry is intended to do. That's because SBA and its attorneys pore over the franchisor's modus operandi. More specifically, they want to be sure that the provisions of the Franchise Agreement do not impose excessive controls upon the franchisee. If they do, SBA will ask the franchiser to make modifications. Otherwise its unit purchasers will not be eligible for SBA financing.

For example, "The franchise agreement may not include a right of first refusal on a partial transfer of ownership within the franchisee entity," says Katie O'Brien, a lawyer with Starfield & Smith, P.C. in Fort Washington, Penn. "This is deemed (by SBA) to create excessive control or affiliation."

KFC ran into a similar problem and had to modify its Franchise Agreement to be listed on the Franchise Registry. "During the review, the SBA raised some issues regarding our standard option agreement," says Haner. "We worked with them to clarify our option process and ultimately addressed all their concerns."

Meanwhile, Atlanta, Ga.-based AmeriCare, a home health care organization, found that
tight credit was impacting its ability to sell franchises. "With the current recession and regulatory environment, we found that our potential franchise owners were facing more challenges with securing a loan," says Debbie Reis, its president. "We entered the process for SBA Franchise Registry because we knew it would simplify the loan process and make it easier for potential AmeriCare franchisees to obtain the funding they needed."

If a franchise is not listed on the Franchise Registry, the lender is required to obtain SBA's approval each time a franchise buyer applies for a loan. It is time consuming. Consequently, some lenders will not accept loan application unless the franchise has been previously vetted and is already on the registry.

So if you are thinking about buying a franchise, check to see if it is listed on the registry. If not, it can impede your progress in accessing the SBA financing programs.

Jerry Chautin is a volunteer SCORE business counselor, business columnist and SBA's 2006 national "Journalist of the Year" award winner. He is a former entrepreneur, commercial mortgage banker, commercial real estate dealmaker and business lender. You can follow him at www.Twitter.com/JerryChautin