THE FUNDAMENTALS OF FRANCHISE FUNDING
in this article:
Westpac’s Daniel Cloete says that, whatever the economy does, the basics of good business remain unchanged
Westpac has had a relationship with Franchise New Zealand right from the magazine’s beginning, 20 years ago – in fact, back in 1990, Westpac was the first bank in New Zealand to establish a specialist franchise unit. Since then, the bank has developed huge experience and expertise in franchising, and is the only bank to have a team of dedicated franchise managers around the country.
Over the past 20 years, the fundamentals of funding a franchise business have not really changed. However, the financial measurement and other tools available have expanded greatly along with the sheer amount of information available from the internet and other sources. This should make it easier for prospective franchisees to find good opportunities and for franchisors to provide the information that will help them find the necessary funding. In this issue, we’ll look at the basic information required; next time, we’ll offer some actual examples.
Everyone wants to own a successful business which provides a good return on the investment they are making without undue risk. That’s why you should thoroughly research the industry, the brand and the business you want to buy.
Despite this, the Massey University finding that over half of all New Zealand franchisees felt they had failed to conduct sufficient due diligence before purchasing their franchise (see page 46), shows that people don’t always avail themselves of all the information sources. Yet there are plenty of ways to find out about franchising and franchise opportunities:
- The Westpac Guide to Franchising is a step-by-step guide on how to get into a franchised business and what to look out for.
- Franchise New Zealand magazine is available from Westpac branches around the country; the accompanying website at www.franchise.co.nz provides detailed information on many aspects of researching and buying franchises.
- Talk to specialist franchise lawyers and accountants, in addition to your local specialist franchise banker to help you check out any opportunity. There’s a list of qualified professionals in the Westpac Directory of Franchising (see p67).
- Westpac also supports the annual Westpac New Zealand Franchise Awards, which identifies those companies achieving excellence in franchising, and supports the Franchise Association of New Zealand’s Code of Practice for franchisors.
- Westpac franchise managers regularly take part in seminars and workshops regarding both franchisee and franchisor funding.
While the credit crunch has made potential franchisees a lot more conservative when looking at sales figures, and banks more careful when looking at the property values that underpin many deals, the actual fundamentals that measure debt servicing (interest cover, debt servicing ratios) have not changed over the last three years – in New Zealand, at least. A bank’s ability to lend against the proposed business is still determined by its projected profitability, perceived debt servicing ability and the stability of its cash flow.
Approaching a bank for funding is sometimes a source of great anxiety, but it need not be a problem at all. Most of the information becomes available normally in the process of investigating a business; it is just a matter of presenting it to the bank in the right way.
To assess a proposal for franchise finance, your bank will typically need:
- A completed Finance Request form, including statement of financial position (usually a standard bank form).
- 12-month cashflow projections for the proposed business including a list of the assumptions used to determine the figures.
- If you are buying an existing business, the past three years’ (preferably) financial accounts.
- If you are buying a new franchise, the franchisor will normally provide cashflow projections as part of its disclosure document, based on expectations and on what other similar stores in the system are doing. These are normally indicative only, but a solid system with a good track record can give a good indication that you or your accountant can use as a base.
- A breakdown of the purchase price of the franchise – what does it include?
- Details of the franchise location and demographics of the area.
- A breakdown of your funding requirements and details of the security you can provide.
The bank needs this information to assess likely risk and security, but it’s all information that you and your advisors should be putting together anyway as part of your due diligence process. Some of the information required will, however, require a little work on your part.
A Personal Statement Of Financial Position. This is normally a standard form designed to make it easy to slot in the necessary information about your finances in a summarised format. Remember to include all liabilities, including such items such as old study loans.
The Business Plan. Although an elaborate business plan may not be required for most applications, it is still very worthwhile. It will help you to understand the business you want to purchase, to focus your thinking and to convince the franchisor and financier of your abilities. It should include an explanation of how you plan to run the business, who will be operating it (yourself, manager, family members) and their abilities, details of working capital and an outline of the market environment.
In addition to your own researches, information will also be available from the franchisor, the seller (in an existing business) and other franchisees in the system. Check the validity of figures from different sources and always try to obtain financial figures that are as current as possible. For existing businesses, use previous years’ figures and up-to-date management accounts to analyse business fundamentals and spot any trends. For a new business, work out cashflow projections for the next 12 months to 3 years using three different scenarios: optimistic, realistic and pessimistic. The franchisor and your accountant will be happy to help. This exercise will tell you about the real value of the business, and confirm how much bank finance you really need.
When the bank receives your application, it will look to see:
- Will the business support the necessary repayment level on the amount you wish to borrow?
- Can the performance of the business be adequately measured on an ongoing basis to provide early indication of any possible problems?
- Have you allowed for different levels of sales and costs via a ‘sensitivity analysis’ – ie, what effects will changes in, say, raw material prices have upon your profitability?
- What security is provided? (this influences the price of the finance)
- How well would the bank be covered in the event of all the sensitive pointers turning negative at once?
- Have all reasonable ‘what ifs’ been allowed for?
- Does the owner understand the plan?
If the answers to all the above questions are clear from the initial application, it will help ensure that you get your funding answer as quickly as possible. It will also increase your chances not just of getting the funding that you need for your venture but also of making a success of it. After all, it’s in the interests of both you and the bank to ensure that you understand as much as possible about your new business before you start.
This advertorial is taken from Franchise New Zealand magazine Volume 21 Issue 1
Contact details for Westpac
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This material is copyright © Franchise NZ Marketing Limited, Franchise New Zealand ™ magazine and Franchise New Zealand On Line . While it may be downloaded for personal use, no part may be reproduced in any form whatsoever without the specific written permission of the publisher.