How to Secure a Franchise Loan: A Beginner’s Guide

Introduction

Patrick Findaro, co-founder at Vetted Biz, introduces Brandon Moore, a former franchisee of Dental Fix and an I.T. professional. Having been involved in analyzing SBA loan data for franchises, Brandon shares his journey as a franchisee, insights on franchise loans, and his work to influence policy and enforcement within the franchising sector.

Entry into the Franchise Space

Brandon’s journey into franchising began in 2015 when he opened a Dental Fix franchise. He was already working with dental offices, providing I.T. support, which led him to see an opportunity for vertical integration. Wanting to move away from his corporate job, he saw the Dental Fix franchise as a business that aligned well with his existing industry experience.

Opening the Dental Fix Franchise

Brandon opened his Dental Fix franchise in Northern Virginia. Initially, he experienced the excitement of starting a business but soon realized that the challenges were more substantial than anticipated. Despite his hard work over two years, the business did not reach the level of income needed to sustain itself, leading him to consider an exit strategy.

The Decision to Exit the Franchise

Brandon held the belief that if a business isn’t profitable after two years of hard work, it is time to look for an exit. Thus, in 2017, he decided to terminate the franchise agreement after concluding that the business was not generating enough income to be viable.

Litigation and Franchise Data Analysis

Upon termination, Brandon faced litigation from Dental Fix, as the franchisor sought to collect royalties for the remaining 18 years of the agreement. Unable to afford extensive legal representation, he turned to his connections within the franchise community and collected data from nearly 20 other franchisees. This experience led him to analyze franchise loan data, uncovering numerous issues regarding franchise financing and operations.

Franchise Financing and SBA Loans

Brandon discovered that Dental Fix franchisees utilized various financing methods, including SBA loans, ROBS (Rollover for Business Startups), and even crowdsourced funding. He highlighted the importance of using a local bank rather than brokers for SBA loans, noting that local banks could provide better oversight and guidance, ultimately helping franchisees avoid risky loans.

Lessons Learned from Franchise Financing

1. Local Bank vs. Broker Brandon emphasized the value of working with a local bank for SBA funding instead of brokers, as brokers often have conflicts of interest with franchisors, leading to risky loans.
2. Equipment Packages Franchisees should carefully scrutinize opening equipment packages offered by franchisors to ensure they are properly collateralized and fairly priced.

Financial Representations and Item 19

Dental Fix did not disclose financial data in Item 19 of its FDD, which made it difficult for franchisees to understand the potential earnings of the business. Instead, financial representations were scattered throughout marketing materials, further validated by a franchisee presented as neutral during discovery day, which proved to be misleading.

Key Advice for Prospective Franchisees

• Avoid Emerging Brands Brandon recommended avoiding emerging brands, as they often lack the predictability required to manage risk effectively.
• Work with a Local Bank Establishing a relationship with a local bank allows franchisees to properly vet the business opportunity.
• Understand Equipment and Fees It is crucial to be aware of potential overpricing in opening equipment packages and other fees imposed by franchisors.

Challenges in Franchise Litigation

Brandon shared his experience with litigation against Dental Fix after he terminated his franchise agreement. He stressed the need for greater accountability and transparency in franchising, emphasizing that franchisors must provide accurate information to prevent similar situations.

Increasing Transparency in Franchising

According to Brandon, greater transparency and accountability are essential in the franchising industry. He believes that franchisors should provide detailed, accurate information about the business model and financials. He also expressed the importance of the FDD in maintaining year-over-year honesty among franchisors.

The SBA Loan Data

Brandon has extensively studied SBA loan data, noting a significant increase in 7(a) loans of $150,000 and under. These loans are typically underwritten by preferred lenders, which means the SBA has little oversight until the loans default. He stressed the need for transparency and thorough evaluation in the franchise loan process, especially in underwriting.

Key Takeaways for Franchise Investors

• Due Diligence Franchise investors must conduct thorough due diligence by working with a trusted local bank, consulting a franchise attorney, and carefully researching all aspects of the franchise.
• Understand Risks Investors should be cautious of emerging brands and scrutinize financial guarantees and other key terms.
• Accountability in Franchising Brandon advocates for better regulations that protect franchisees and ensure transparency throughout the franchising process.

Conclusion

Brandon Moore’s experience offers critical lessons for both franchisees and franchisors. Franchising can provide significant opportunities, but it requires careful consideration and transparency to ensure mutual success. By doing thorough research, partnering with trusted advisors, and understanding the risks involved, both franchisees and franchisors can benefit from a healthy franchise relationship.