Raising capital is one of the first and most critical steps in launching a franchise or startup business. Whether you are funding a $150,000 service franchise or a $500,000 restaurant concept, the way you structure your financing has legal consequences that can affect your liability, your relationships with investors, and your ability to operate the business on your terms. At Lopes Law LLC, we help franchise buyers and startup founders structure their capital raises properly from the beginning, because fixing a poorly structured deal after the money has changed hands is always more expensive than getting it right the first time.

This guide covers the most common capital-raising options for franchise buyers and startup founders, the legal documents each approach requires, and the securities law considerations that many first-time business owners overlook.

What Are the Most Common Ways to Fund a Franchise Purchase?

Franchise buyers typically use one or a combination of these funding sources:

Personal Savings and Retirement Funds

The simplest funding approach is using personal savings. Many franchise buyers also use a structure called a Rollover for Business Startups (ROBS), which allows you to use retirement funds (401(k) or IRA) to invest in a new business without paying early withdrawal penalties or taxes. ROBS transactions require setting up a C corporation, creating a new retirement plan within that corporation, and rolling your existing retirement funds into it. The corporation then uses those funds to purchase the franchise.

ROBS is legal but heavily scrutinized by the IRS. At Lopes Law LLC, we recommend working with both a franchise attorney and a ROBS specialist (such as a third-party ROBS administrator) if you pursue this route. The entity formation and legal structuring alone typically costs $3,000 to $5,000, and the ROBS administrator charges a separate setup and monthly maintenance fee.

SBA Loans

SBA 7(a) loans are one of the most popular financing options for franchise buyers. The SBA does not lend money directly. Instead, it guarantees a portion of the loan made by a participating lender, which reduces the lender’s risk and makes approval more likely for borrowers who might not qualify for a conventional bank loan.

Key facts about SBA franchise financing:

• Maximum loan amount: $5 million
• Down payment: typically 10% to 30% of the total project cost
• Interest rates: variable, tied to the prime rate plus a spread (typically prime + 2.25% to 2.75%)
• Terms: up to 10 years for working capital, up to 25 years for real estate
• The franchise must be listed in the SBA Franchise Directory
• Personal guarantee required from all owners with 20% or more equity

At Lopes Law LLC, we review loan documents as part of our franchise advisory services. The personal guarantee in an SBA loan is separate from the personal guarantee in the franchise agreement, and understanding both is essential before you sign either one.

Conventional Bank Loans

Traditional bank loans without an SBA guarantee are available to borrowers with strong credit, collateral, and business experience. Conventional loans often have faster processing times but may require larger down payments (25% to 30%) and offer less favorable terms than SBA loans. Banks that specialize in franchise lending, such as those familiar with specific franchise systems, can sometimes offer competitive terms based on the franchise brand’s track record.

How Do You Raise Capital from Investors for a Franchise or Startup?

Many franchise buyers and startup founders bring in investors, whether friends and family, angel investors, or private equity groups, to fund part or all of the business. Investor capital introduces legal complexity that self-funding does not.

The Securities Law Question

When you offer someone an ownership interest in your business in exchange for their investment, you may be offering a “security” under federal and state law. The Securities Act of 1933 requires that securities be registered with the SEC unless an exemption applies. For most small business capital raises, the relevant exemptions are:

• Regulation D, Rule 506(b): Allows you to raise unlimited capital from up to 35 non-accredited investors and unlimited accredited investors, without general solicitation or advertising.
• Regulation D, Rule 506(c): Allows general solicitation but limits sales to verified accredited investors only.
• Rule 504: Allows raises up to $10 million in a 12-month period with fewer restrictions, but state law filings (blue sky compliance) are typically required.

Violating securities laws, even unintentionally, can result in the investor having the right to rescind their investment (demand their money back) plus interest and attorney fees. At Lopes Law LLC, we ensure that our clients’ capital raises are structured to comply with the applicable exemption, because the consequences of non-compliance can be devastating to a new business.

Essential Legal Documents for Investor Capital

If you are raising capital from investors, you need these documents, at minimum:

• Operating agreement (LLC) or shareholders agreement (corporation): Defines ownership percentages, capital contributions, profit distributions, management authority, voting rights, and exit provisions.
• Subscription agreement: The contract between the company and each investor, detailing the terms of the investment, the investor’s representations, and the securities being purchased.
• Private placement memorandum (PPM): A disclosure document that describes the business, the investment terms, the risks involved, and the use of funds. While not always legally required, a PPM protects you by demonstrating that investors were fully informed before investing.

At Lopes Law LLC, entity formation services for franchise and startup businesses range from $1,500 to $5,000 depending on complexity. Multi-member LLCs with investor capital on the higher end of that range require more detailed operating agreements.

What Legal Mistakes Do Franchise Buyers Make When Raising Capital?

After working with hundreds of franchise buyers and startup founders, the team at Lopes Law LLC has seen the same legal mistakes repeatedly:

• Handshake deals with family investors. Even when money comes from family, you need a written agreement. Without one, disputes over profit distributions, management decisions, and exit terms become personal and often end up in court.
• Ignoring securities compliance. Accepting $50,000 from a friend in exchange for 20% of your LLC without proper documentation is likely a securities offering. If the business fails, that friend may have legal grounds to demand their money back.
• Failing to coordinate with the franchise agreement. Most franchise agreements restrict ownership transfers and require the franchisor to approve all owners. If you add an investor after signing, you may be in breach of the franchise agreement.
• Not matching entity structure to financing needs. An LLC taxed as a partnership works differently than an S-corp or C-corp for investor purposes. The wrong entity structure can create tax inefficiencies, limit your ability to bring in certain types of investors, or complicate future fundraising.

How Should Franchise Buyers Structure Their Business Entity?

The entity you choose affects liability protection, tax treatment, and your ability to bring in investors. Most franchise buyers form one of three types:

Entity Type	Best For	Investor Flexibility
Single-Member LLC	Solo owners, simple structures	Limited; adding members changes tax treatment
Multi-Member LLC	Partners, family investors	Good; flexible profit allocation via operating agreement
C Corporation	ROBS transactions, larger investor groups	Best; multiple share classes, easiest for outside investors

At Lopes Law LLC, entity formation includes drafting the articles of organization or incorporation, the operating agreement or bylaws, and any investor-related documents. Our entity formation services start at $1,500 for straightforward single-member LLCs and range up to $5,000 for complex multi-member structures with detailed investor provisions.

Frequently Asked Questions

When Should You Involve a Franchise Attorney in the Capital-Raising Process?

The best time to involve a franchise attorney is before you finalize your financing structure. At Lopes Law LLC, we frequently work with clients who are simultaneously evaluating a franchise opportunity and determining how to fund it. Coordinating the legal review of the FDD with the entity formation and financing structure ensures everything is aligned.

For franchise buyers, this typically means engaging us for both an FDD validation review ($3,000 flat) and entity formation ($1,500 to $5,000), often as part of the same engagement. For startup founders not buying a franchise, entity formation and investor documentation are the primary legal services needed at the capital-raising stage.

At Lopes Law LLC, we offer services in English, Spanish, and Portuguese, which is particularly relevant for international investors exploring U.S. franchise and startup opportunities. Understanding U.S. securities law, entity structures, and franchise regulations in your native language eliminates misunderstandings that could prove costly.

Reach out, we are friendly. Call now for a free consultation at (267) 777-9117 or schedule your free 20-minute consultation online.