Ready-Set-Go! How SBA 504 Can Take Your Franchise to the Next Level

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Faced with the challenge of finding the best quality daycare for their first child, Marla and Jason Brunk searched at length in the St. Louis, Missouri area. After fruitless visits to numerous preschools, they happened upon a perfect fit – a school with an educational philosophy and curriculum that they loved.  It was the first Goddard School franchise to open in the St. Louis area and their young child was one of its first enrollees.  The preschool was a standout in the community and after its first month, had a waiting list of interested parents.  When it was time for their other two children to attend school, there was no question that it would be the Goddard School.

Marla and Jason had always dreamed of owning their own business. Their positive experiences and personal connection to the Goddard School proved it to be a business they could believe in. So they approached the franchisor and started the process to open their own preschool. Marla readily liquidated her retirement plan to provide financing for the purchase of the franchise and the cost of the project. Their first Goddard School launched on January 23, 2006 in Arnold, Missouri. In their lease with the building owner, there was an option to purchase the 8,300 square foot building within the first three years. Unexpectedly, within six months of opening the school, the owner informed them that he needed to sell the property. Recognizing the unique unforeseen opportunity, the Brunks explored their financing options.  As their financial resources were limited, conventional financing was not an option, but through contact with a local CDC, they were thrilled to learn that they qualified for the SBA 504 Program.

CDCs are the SBA-designated providers of the 504 Loan Program.  The 504 program is designed to provide qualified businesses with up to 90% financing for building acquisition, renovation, ground-up construction and long term equipment through a unique partnership with banks.  The mission of the CDC is to be a financial resource for improving the economic well-being of businesses and communities.

The Brunks found their local CDC to be an invaluable partner throughout the financing process. “The CDC was willing to go the extra mile.  They were excellent at customer service, and they really knew their job.”  The CDC’s loan specialist even came to the Brunk home to assist at the time of closing. With this kind of hands-on help throughout the process, Marla and Jason were able to remain focused on both their family and their growing business.

Under the 504 Program, the Brunks’ real estate acquisition looked like this:

Uses

Purchase Land and Improvements

1,750,000

99.70%

Professional Fees

          6,000

          .30%

Total

$1,756,000

100.00%

Sources

Bank

878,000

50.00%

SBA 504

612,500

34.88%

Borrower Contribution

      265,500

      15.12%

Total

$1,756,000

100.00%

A conventional loan scenario would have likely required the couple to contribute at least 25%, $439,000, towards the building acquisition.  By using the 504 Program, they were able to keep over $173,000 in their business as working capital to finance future growth.  Since their school was less than two years old, they were required to contribute 15% towards the acquisition.  If their school had been open for more than two years, they would have been required to put down only 10% on the building, which would have saved them over $263,000 in working capital.  In fact, when they opened their second Goddard franchise in Manchester, Missouri, they were able to purchase the building with only 10% down!

There are currently 386 Goddard Schools across the United States and the Brunks are in the planning stages of opening their fourth location in the city of St. Louis, Missouri.  There is no doubt in Marla’s mind how she and Jason will finance the building acquisition: “We definitely want a 504 for this location.  It’s been a great long term tool that’s fueled our success.”

What makes a franchisee a potential candidate for the SBA 504 Program?  There are some basic requirements that must be met. The franchisee must be looking to finance fixed assets, such as a building or long-term equipment.  It must be for-profit and located within the United States.  The franchisee, including any affiliated entities, must have a tangible net worth of less than $15 million and after-tax profits, averaged over two years, of less than $5 million. Finally, it must occupy at least 51% of the property for existing buildings and 60% for ground-up construction (and for equipment, the use must be for business operations.)

The 504 Program could be the perfect fit for your financing needs.  To find out more about this program, contact your local CDC, which can be found by visiting either the website of the national association for CDCs, www.nadco.org or SBA’s website, www.sba.gov.

Why not give a CDC in your area a call?  All you have to gain is a great financing vehicle for the long term success of your franchise!

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