Raising equity for a franchise deal

December 05, 2024

by a searcher from Columbia University - Columbia Business School in Scarsdale, NY 10583, USA

I am looking for someone with experience in raising equity for a franchise deal. I'm trying to figure out how the timeline works. Do I sign on the dotted line, then raise the equity, or vice versa? Is an LOI type document thats seen in the space?

In a perfect world I would raise the capital first. But I am worried about losing the opportunity.

Its possible having all required capital up front is required in the franchise contract...but all signs from franchisor are that I don't need all capital up front at day of signing, I could be wrong...

Interested in peoples thoughts. Thanks!

Reply by a searcher
from University of Connecticut in Greenwich, CT, USA

I think many FDDs will require your fellow equity investors to sign the Franchise Agreement as well if you're raising that way. I suppose if you raise the equity post signing you're on the hook for the performance of the business in the end. Maybe there's a way to structure it with an SPV that pools the capital coming in above you presumably in the form of pref? if you're using SBA loan they will want to see that as much as equity as possible so I'd just ask the franchisor and/or SBA if you're going that route. There are mezz / unsecured lenders you can tap which will cost more but could be your bridge beyond that if it's helpful. Let me know if you want to chat.

Reply by a searcher
from University of California, Berkeley in Orange County, CA, USA

I'm under LOI to acquire a franchise without any investor. The franchisor doesn't begin their review and approval process until the APA with the seller is signed to avoid disclosing their proprietary information. It will take 30 days to get franchise approval and close. So I think you have time after signing the LOI to raise equity, concurrently while doing due diligence, getting financing, etc.

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