Franchise angel investors are individuals or group of individuals that provide capital (and in some cases, expert advice) to aspiring business owners to fund their franchise businesses.

Franchising: A Successful Business Model

Since the 1940s, franchising has served as a vehicle through which small businesses have grown into successful national chains. Franchises have a 90 percent success rate, making it the business model with the lowest failure rate. A study undertaken by the U.S. Chamber of Commerce showed 97 percent of franchises were still operating after the first five years and that 86 percent of them were still under the same ownership.

As such, franchising is a thriving strategy through which individuals and small businesses can grow and prosper, but only if the capital needed is made available.

Funding a Franchise Business

The cost of acquiring a franchise can be prohibitive. The more expensive the franchise, the greater its earning potential. Individuals must pay for the right to use the name of the franchisor and benefit from expert assistance.

Individuals who are looking to fund their franchise business typically use their savings, mortgage their homes, or borrow from friends and family. They may also seek out angel investors.

In the U.S., angel investors account for over $80 billion in seed capital investment. They invest $7 to $10 billion annually and typical transaction sizes range from $100,000 to $1 million. Angel investors usually invest in industries where they have expertise.

Although angel investors are usually individuals, they sometimes form investor groups or networks where they jointly fund businesses based on recommendations from one or more group members. Angel networks may operate at the following levels:

  • Local.
  • Regional.
  • National.

Although each network has its own stipulations, individuals looking for startup capital generally pay a fee to join and present their business plans.

Role of Angel Investors

Angel investors work directly with the business in the role of advisor. This is advantageous for new franchises since they benefit from the contacts of their angel investor and have expert help when dealing with franchisors, advertisers, landlords, and suppliers.

The investment decisions of angel investors are usually based on individual tax consideration, which may affect the amount and timing of the investment. Based on their extensive business experience, they provide new franchise owners with invaluable advice that will help their business stay on track.

If you are looking for angel investors to fund your franchise business, you must remember that they will own a part of our business. You must be willing to give up some control of the business and a share in the profits. In effect, the angel investor becomes your partner and you may have to seek approval for certain business decisions.

Although angel investors usually provide capital to businesses where they have personal relationships with the owner, there are firms that can refer individuals to angel investors, giving them the opportunity to penetrate the angel investor market.

A major benefit of using a franchise angel investor is the simplicity of investment agreement/documents. These agreements are less formal than those required by other sources of capital.

Before meeting a franchise angel investor, you should develop a well-documented business plan that contains:

  • Industry research.
  • Analysis of the competition.
  • Marketing strategies.
  • Your customer base.
  • Market size.
  • Funding requirements.

Although you can use the information provided by the business franchisor, you would do well to adapt it to your customer base and location, and include other necessary information.

When you are done developing the business plan, extract the most important points and use it to write an executive summary. Since a business plan takes time to prepare, you should do this before commencing your search for franchise angel investors.

Deliver Your Pitch

Although you may have a business plan, you still need to come up with an elevator pitch. This is a 60-second pitch about your franchise business that promotes its merits and discusses why an angel investor should be interested in funding the business. The aim of the pitch is to engender interest and get potential investors interested in reading your executive summary and business plan. Practice your pitch before meeting with potential angel investors and ensure that the name of the franchise is included in the pitch.

If you need help with franchise angel investors, you can post your legal need on the UpCounsel marketplace. UpCounsel accepts only the top 5 percent of lawyers on its site. Lawyers on UpCounsel come from prestigious law schools like Yale Law and Harvard Law and usually have 14 years of legal experience, including work on behalf of or with companies like Airbnb, Menlo Ventures, and Google.