At some point during their journey towards business ownership through franchising, all franchisees will hear a version of that famous line from a Tom Cruise movie: "Show me the money!"

Indeed, for all the talk of shared goals, intertwined fates and the success of the franchisor being dependent on that of its franchisees, buying a franchise is, in many respects, a straightforward business deal when it comes to the financial aspect.

You, the prospective franchisee, are going to get something from the franchisor; in return, the franchisor expects to get some money. In most cases your purchase will consist of a proven business system, use of a recognizable business name and trademark, training and various kinds of ongoing marketing and operational support.

Actually, this purchase is somewhat more complicated than most other business deals because it is open-ended to some extent. At the time of the initial purchase-when you sign the company's franchise agreement-you pay an upfront franchise fee, which can range from a few thousand dollars to several hundred thousand.

From then on, with very few exceptions, franchisees continue to pay for the right to do business as part of an established franchise network for as long as the franchise agreement is in effect, generally 10 to 15 years.

These payments, called royalties, are most often calculated as a percentage of each franchise's monthly sales volume; sometimes an additional, smaller percentage is levied to pay for advertising and/or marketing programs.

Combined royalty fees can range from, in rare cases, nothing at all (Lubbock, TX-based Packaging and Shipping Specialists; see First Person feature in this issue) to almost 17% of gross sales at some big fast food chains.

From a financing perspective, royalties are a separate issue from making the initial purchase. It is assumed that the franchisee will have a readily available source of funds to pay royalty fees in the form of cash flow once the business is up and running. Some franchisors even provide start-up franchises with an initial grace period ranging from several months to a year during which royalty fees are suspended or greatly reduced.

The major obstacle most new franchisees face is coming up with the lump sum payment required to get the franchise off the ground. The initial franchise fee, while often substantial, may represent just a small part of the total capital investment required. Other costs can include securing a location, leasehold improvements, equipment, training (although many franchisors include this in the initial franchise fee), and more.

All told, the initial capital required to launch a new franchise business can easily run into several hundred thousand dollars, and for some big-name franchises in industry sectors such as foodservice and hospitality, it often exceeds $1 million. In addition, since most new businesses take time before they begin generating a substantial profit, franchisees must budget for their own living expenses during the startup phase.

Deals in the million-dollar-plus category are often put together by partnerships and syndicates that specialize in acquiring, opening and operating franchises in a specific industry segment. These "mega-franchisees" have access to the same kinds of funding sources available to other big corporations, including investment bankers, institutional lenders and even public stock offerings.

They bear little resemblance to the average first-time franchisee who is interested in buying a single franchise outlet or perhaps a master license for a particular region. These "average" franchisees usually have to be more creative in nailing down financing for their ventures.

The first place to look is in your own pocket. While 90% and even 100% financing has become all the rage in the home mortgage industry recently (much to the chagrin of Alan Greenspan and other concerned economists), that's not been the case among business lenders. Virtually all lenders want to see a substantial commitment of personal financial resources on the part of the borrower before they will even consider unlocking their vaults.

The reasoning behind that is straightforward: A business owner who has his or her own resources at risk is likely to be more motivated to go all out to insure the business's success than someone who is only playing with "OPM"-short for "other people's money." Lenders, even those backed by the Small Business Administration (SBA), generally want to see at least a quarter to a third of the initial investment coming from the borrower's personal financial resources.

That concept is nicely summed up in a little story that has been making the rounds in the franchise world for many years: A pig and a chicken decide to start a business selling ham-and-egg sandwiches but soon get into an argument about who should get top billing in the company's name. "It should be me," insists the chicken, "because I am dedicated to the company's success." Counters the pig, "You may be dedicated, but I am committed."

Although lenders stop short of demanding the Shakespearean "pound of flesh" from borrowers today, they do look for the kind of commitment that the pig is willing to demonstrate.

Most people have a significant portion of their financial net worth tied up in two resources, their homes and their retirement savings. Both can be tapped as a source of initial franchise financing, but experts warn that this should only be done after careful consideration.

In the low-interest-rate environment that has characterized home lending for the past several years, many franchisees have opted to tap the equity in their homes to finance all or part of their business startup. Mortgage interest rates are among the lowest available, and the interest may be tax deductible, so this approach can make sense.

However, financial experts advise leaving at least 25% of your home's equity intact. Many startup businesses face a need for additional financing within the first few years, and lenders will ask for collateral to secure the loan. If your house is fully mortgaged, it doesn't qualify as collateral.

Some prospective franchisees have hefty nest eggs tied up in their retirement accounts but fear tapping them because of the tax and penalty charges that early distributions from such plans ordinarily trigger. However, there is a way to access that money without incurring hefty charges: ERSOP.

ERSOP stands for Entrepreneur Rollover Stock Ownership Plan, and it is designed to allow entrepreneurs use money in their 401(k) plans, IRAs or other qualified retirement accounts for business purposes without running afoul of IRS regulations.

Promoters of ERSOP plans describe them as "tax-qualified" profit-sharing plans that allow for rollover money to be invested in the sponsoring business. They are extremely complicated and should not be attempted without the assistance of a professional accountant well-versed in this area of the Internal Revenue Code.

In fact, ERSOP does not exist in IRS terminology; it is a marketing phrase coined by companies that promote the plans. An ERSOP is really a specialized kind of ESOP (Employee Stock Ownership Plan), which is a well-recognized type of defined-contribution benefit plan.

The ERSOP process involves the creation of a C corporation and the establishment of an ESOP for the new company. Your existing retirement funds are rolled over into the ESOP, which then buys up the stock of the C corporation. Even promoters of ERSOP plans admit that the IRS views them with some skepticism, although the agency has issued "favorable determination letters" in several cases.

Perhaps the biggest drawback to an ERSOP is the tremendous gamble it represents. Financial planners counsel investing retirement funds in a well-diversified portfolio to mitigate risk and maximize prospects of long-term gains. Risking all your retirement savings on a single, unproven investment is the very antithesis of such a strategy.

Losing your job may not be high on the wish list of most people, but for some individuals-especially those fortunate enough to receive a sizeable severance package-downsizing can open a gateway to opportunity. Franchise recruiters and business brokers report noticeable upturns in the number of new franchisees coming from the ranks of corporate America in the wake of big layoffs and restructuring programs. Many use their severance packages to finance some or all of their franchise purchase.

Counting on "pennies from heaven" may not be a practical strategy for first-time franchisees, but turning to "angels" of a different sort can be an option. Small-business venture capitalists-also known as "angel investors"-are a major source of funding for startup businesses.

"Angels continue to be the largest source of seed and startup capital," says Jeffrey Sohl, director of the Center for Venture Research at the University of New Hampshire Whittemore School of Business and Economics.

Overall, angels invested some $11 billion in 26,000 business startups in the first half of 2005, with venture capital investments on track to surpass $22 billion for the entire year. Almost half-48%-of the money put up by angel investors in the first two quarters of 2005 went to startup ventures.

At some point in their careers, most entrepreneurs find it necessary to go to a bank or a commercial lender for funding. Even if they are able to finance the startup phase of the operation from other sources, they may need additional funding for expansion, such as opening additional franchises or becoming a master or territory franchisee.

Many franchise companies offer assistance in this area. Among the 500 largest franchise systems, about 15% offer in-house financing, more than 40% provide help in obtaining financing from a third-party lender, and about 15% offer some combination of in-house and third-party financing assistance.

The SBA plays an important role in the financing plans of many franchisees. While the agency does not make loans directly, it guarantees up to 85% of startup business loans made by qualified lenders. Over the past 10 years or so, the SBA has become more focused on franchise businesses. In some parts of the country, more than half the loans guaranteed by the agency are written for franchises.

To help improve access of prospective franchisees to SBA-guaranteed loans, the agency has partnered with FRANdata to create the Franchise Registry, a database of franchise companies that have been verified as eligible for such loans. The database (www.franchiseregistry.com) helps reduce red tape, time and costs for both applicants and lenders.

Loans of this type are commonly called SBA 7(a) loans, a reference to the section of law that authorizes the program. SBA guarantees up to 85% of 7(a) loans up to $150,000 and 75% of loans above that. The program has a maximum loan amount of $2 million, with SBA's exposure limited to $1.5 million.

Federal, state and local governments and some non-government organizations offer a variety of special-interest loan programs. These programs make funding available, often at favorable terms, to groups such as minorities, veterans, women and the disabled.

No matter what type of lender you are dealing with, good preparation can go a long way towards boosting your chances of successfully landing a loan. Following are some tips from financial experts that may be useful.

It's not always easy finding a way to finance a new franchise business, but the potential rewards of franchising can make it all worthwhile. With the proper planning and preparation and a healthy dose of persistence, you can be all set to respond when a franchisor says to you, "Show me the money!"