Equity Financing

Equity financing, which involves giving up a portion of ownership in the franchise or the franchise's profits, can help raise funds to purchase a franchise. The key difference between equity financing and partnerships is that the individual contributing capital is not involved in the day-to-day management of the franchise. This may or may not be allowed by franchisors. Many franchisors require that all owners attend certain training functions and/or are involved a minimum number of hours working in the business.

Equity financing, for a number of reason, is not commonly used for franchise purchases. First of all, some franchisors have stipulations that prohibit a non-active owner. Second, franchises typically require less capital than other businesses. Third, franchises typically have geographic restrictions that place certain limits on the size to which the business may grow. Most equity investors are interested in the appreciation of a business, and franchises do not provide the same unlimited potential as other businesses (although the franchise model can greatly reduce the amount of risk). Fourth, most equity financing occurs in large businesses. Because franchises are typically small businesses, equity financing is rarely used. Most equity financing used with regard to franchises is from friends or family members.