How to Raise Capital for Franchise Units From Private Investors
By Joel Arberman, founder of Prepared to Raise · 17 companies taken public, 30+ private placements prepared · Published November 9, 2026
Lending first, investors for the equity
SBA 7(a) and franchise-specialist lenders finance franchise units routinely, often with the franchise listed in the SBA directory, but they require an equity injection, commonly 10 to 30 percent of the project, plus a personal guarantee from significant owners. For many franchisees the raise is that injection plus a working capital cushion. Investors like this structure because their money is leveraged by the loan; lenders like it because the operator has outside money committed. Be clear how the lender treats investor money (equity versus debt) and who must guarantee. Investors or a loan.
The franchisor's rules
- Approval of owners. Most agreements require franchisor approval of anyone who holds more than a set percentage of the franchisee entity, with background and financial checks.
- Operating partner. A designated person, usually you, must hold a minimum ownership stake and run the business full time.
- Transfer restrictions. Selling or transferring interests often needs consent and may carry a transfer fee.
- Passive investor limits. Some systems restrict passive owners or require all owners to sign personal guarantees of the franchise agreement.
Structure the raise so the franchisor can approve it before you close: typically non-voting preferred units for investors, each below the approval threshold, with you as the operating partner holding the required stake. Ask the franchisor for their investor and ownership guidelines early; many have a standard process.
What investors test
- Unit economics from the Franchise Disclosure Document Item 19 (if the franchisor provides financial performance representations), from other franchisees, and from your own units if you have them: revenue, prime costs, occupancy, royalty and marketing fees, and unit-level cash flow.
- Total project cost: franchise fee, buildout, equipment, opening inventory, pre-opening costs and working capital, with the lease terms.
- The ramp: months to breakeven and to mature volume, conservatively.
- The operator: your experience in the system or industry, the general manager plan, and what happens if you cannot run the unit.
- The development schedule, if multi-unit: what you have committed to open by when, the penalty for missing it, and how each unit is funded.
Item 19 figures are the franchisor's statements, not yours. Present them as such, and never turn them into a projection for your unit without your own assumptions and risk language.
Structures that fit
- Preferred units with a preferred return from unit cash flow and a buyback at a multiple, which also keeps you as the controlling operating partner.
- Unit-level entities for multi-unit operators, so each unit's investors share that unit's results, or a holding entity across units for diversification. Each has trade-offs for lending, the franchisor and investors.
- Notes for working capital or an acquisition gap.
How to show a return from cash flow. Multi-unit portfolios do sell to larger franchisees and private equity, which is good upside.
Where the investors come from
Your professional network, family, other franchisees in non-competing systems, local business owners who know the brand, and, carefully, customers. Franchise raises are typically $150,000 to $1 million from 5 to 20 people under Rule 506(b). How to raise from people who know you.
Mistakes specific to franchise raises
- Closing investors before the franchisor has approved the ownership structure.
- Presenting the franchisor's Item 19 averages as your forecast.
- Underfunding working capital; new units almost always ramp slower than the plan.
- Signing a development schedule the raise cannot fund.
- Forgetting that the raise is a securities offering in its own right, separate from the franchise agreement. Which exemption.
The 90-day preparation plan applies, with the franchisor's approval process added. Prepared to Raise prepares franchisee raises on fixed fees and never finds, solicits or introduces investors.
Related questions
Does my franchisor have to approve my investors?
Usually, above an ownership threshold set in the franchise agreement, with background and financial checks. Many franchisors also require a designated operating partner with a minimum stake. Confirm the process before you close any investor.
Can I use investor money as the equity injection for an SBA franchise loan?
Often yes, if it is structured as equity the lender accepts. Lenders differ on how they treat investor capital and who must guarantee, so confirm with the lender before setting terms.
Can I use the franchisor's Item 19 numbers in my investor materials?
You can cite them as the franchisor's disclosed figures, clearly attributed, but your own projections need your own assumptions and risk language. Never present system averages as a forecast for your unit.
How much do franchisees typically raise from investors?
From about $150,000 of equity behind a loan for a first unit to $1 million or more for multi-unit development, depending on project costs and the lender's equity requirement.
Where to start
Get the franchisor's ownership guidelines and a lender's term sheet first, then size the equity with how much to raise and follow the 90-day preparation plan.
This article is general information for founders, not legal, tax or investment advice. Securities rules depend on your facts; confirm your plan with a securities lawyer before you accept money.