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GOOD NEWS ON FUNDING FOR FRANCHISE BUYERS

by Simon Lord,
last updated 23/08/2012

July 2012 - Franchisors are saying bank funding is not an issue for prospective franchisees looking at solid propositions, but other results are mixed after a record high in April

The latest Franchising Confidence Index demonstrated mixed results across its usual range of confidence measures. Sentiment reductions were recorded for general business conditions, access to both financing and suitable franchisees, and franchisee sales and profitability levels. By contrast, sentiment improved for availability of suitable locations and staff, franchisee operating costs, and franchisor growth prospects. A special focus revealed that good propositions can still attract the necessary funding.

After record net results in the April survey (net 46 percent), confidence in general business conditions decreased with franchisors less optimistic (net 22 percent) about the next 12 months. Service providers echoed this reduction for franchisors generally, but were more optimistic (net 34 percent). While reduced, franchisor sentiment towards general business conditions was more optimistic than that indicated by general business in the July NZIER (minus 1 percent) and BNZ (9 percent), and June National Bank (12.6 percent) surveys.

Franchisors’ sentiment toward their own growth prospects consolidated to a net 54 percent level. Meanwhile, service provider sentiment toward the same featured a violent drop to a net 18 percent, from 65 percent in April.

Good franchisees are hard to find

Franchisor sentiment toward access to suitable franchisees reduced to a net 7 percent from 14 percent in April. Meanwhile, sentiment toward accessing both suitable locations and suitable staff both improved to a net 21 percent and 12 percent, respectively. Service provider sentiment dropped markedly towards franchisor access to suitable franchisees and locations.

‘Despite some of the positivity in response and comments, it is clear that substantial challenges to profitability remain, as they do for other forms of organisation,’ commented Dr Callum Floyd of Franchize Consultants, which runs the quarterly survey. ‘Many are experiencing pricing pressure, many sectors remain competitive, and many input costs continue to rise. Combined, these and other factors pressure profitability at all levels... Overall, the general outlook from both service providers and franchisors was that even though things are still chall enging, they are slowly improving.’

Franchising Confidence Index July 2012

Funding still available for solid franchisee propositions

This latest Franchising Confidence Index also featured a special focus on bank funding for franchisees. Responding franchisors generally agreed solid franchisee propositions could still be funded; in fact,  66 percent of franchisor respondents indicated a solid franchisee proposition is just as likely to be funded by one of the main banks as it once was.

Respondents were asked to rank their level of agreement or disagreement with four statements:

  • Thinking about my own franchise network, I believe a solid franchisee proposition is just as likely to be funded by one of the main banks as it once was.
  • I believe the growth of my franchise network is ‘not’ being constrained by access to bank funding for new franchisees.
  • I believe that there may be more that my franchise network can do to make my system more fundable.
  • I am interested in learning more about how my franchise system could become more fundable.

The results were as below:

Franchising Confidence Index July 2012 - Funding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Despite this, there was a slight decrease in confidence from franchisor respondents (from net 16 percent to 15 percent) in relation to ease of access to funding. Service providers were more pessimistic, moving from 39 percent (in April) to 7 percent.

Several service providers commented on what franchisors could do to improve their attractiveness to banks. Examples included:

‘Franchisors need to have good quality benchmarking and franchisee results in order to assist in getting banks to fund growth.’

 ‘Funding depends on franchisees having equity - as it always did - and on franchisors having workable business models - as it always did. For many franchisees, their equity has reduced, resulting in less borrowing power. Some franchisors have found their model is not sufficiently robust to be profitable in the hard times. Why blame the banks for that?’

‘I consider that any tightening of funding has been more to do with the lack of or reduction in information provided by franchisors. Banks are very aware of the GFC and are not surprised to see financial accounts reflecting this. Consider they are more interested in the now and what is being done to counter the GFC impacts, than they are the past. Franchisors/franchisees should be sharing their business plans to give the funders the confidence that the strategies are/will be in place to see the system through this period.’

The data and analysis presented represents the views of 41 franchisors and 19 service providers collected between Monday 23 and Friday 27 July 2012. Findings from both groups are reported separately. Read the full report here.

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