last updated 23/09/2019
Getting The Money
last updated 23/09/2019
Daniel Cloete of Westpac explains how a specialist banker can help you get what you need to buy a franchise
As the cover story in this issue shows, there are lots of good financial reasons for choosing a franchise over other models, and that’s as true for existing businesses as it is for new ones. For prospective investors, though, one of the most important factors would be the ease of finding the necessary funding.
Choosing a franchise not only gives you access to proven figures when it comes to initial costs and the level of working capital required, but also enables you to benchmark the financial performance and KPIs of your chosen business against others in the same group (read more about this at www.franchise.co.nz/article/2719). Having all of that information available can really pay off when it comes to developing your business plan and funding application.
see your specialist franchise banker as an ally
Obtaining bank finance might seem to be a big issue, especially for first-time buyers of small businesses. In fact, it could essentially be a straightforward process which uses the same information you need to assess the business anyway. One thing that the potential franchisee should remember is that he or she is the bank’s client – not the franchisor! It is therefore in the bank’s interest that its clients join a stable, profitable franchise system without paying too much for the business.
You should therefore consult a specialist franchise banker and see them as an ally that has your interests at heart. A good specialist already knows most of the franchises available and can quickly see if franchisors’ claims (like income or expenses) are realistic. They can also offer different funding structures, making the best use of your equity and the ability to partially fund against your franchise business’s cash flow. This can be the case even with a new outlet, if the franchise is a proven one.
This does not mean you should not do a proper assessment yourself. Your bank is going to expect you to know the business that you are planning to buy and its financial position intimately. By doing your own research and using experts like franchise-experienced accountants and lawyers, you can save yourself time and money and identify the right business opportunity for you.
what will your banker require from you?
So what information does a bank require to process a prospective franchisee’s application quickly and effectively? This is sometimes a source of great anxiety but it need not be a problem at all – most of the information will become available anyway in the process of assessing the business.
Cashflow Projection. A bank typically needs a 12-month cashflow projection for the proposed business, including a list of the assumptions used to determine the figures. If the business is an existing one, the bank will also want to see the historic financial accounts for an existing business.
In the case of a new franchise, the franchisor may provide cashflow projections based on expectations and on what other similar stores in the system are doing. These are not guarantees, of course, but in a solid system with a good track record they can give a good indication of possible performance. If done properly (with the assistance of your accountant), cashflow projections will tell you about the real value of the business as well as how much bank finance you need to obtain.
Information. The bank will want to see a breakdown of the purchase price of the franchise and factors like details of the franchise location and demographics of the area if applicable. It will also look at the buyer’s own financial position.
Business Plan. Producing a business plan is a very worthwhile exercise and need not be elaborate in most cases. It will help you better understand the business you want to purchase, focus your thinking, and convince the franchisor and financier of your abilities. It should include aspects like an explanation of how you plan to run the business; who will be operating the business (yourself, manager, family members) and their abilities; working capital required; information on the market environment and background on the specific franchise under consideration.
Finance Request. Getting the finance you need is not usually a question of just asking for a loan. You want to borrow the right amount of money only when you need it and on the best possible terms. Different needs can be financed in different ways: for example, short-term working capital via overdraft; medium-term business finance via a term loan; funding equipment or vehicles via equipment finance (this is usually preferable to leasing as you end up owning the item, enjoy the same tax benefits and can use the item itself as security). The bank would look at the term of your franchise agreement, the debt servicing capabilities of the business and the particular needs of the industry in determining the best mix for your individual needs.
how much will the bank be prepared to lend you?
As always, the question is not, ‘How much can you borrow?’ but rather, ‘How much can the business afford to repay while still allowing the owner a decent living?’ You (and your bank) would not want you to be unsuccessful because of being over-geared. The current historically low interest rates could easily lull you into taking on too much debt, so you want to look at what happens if interest rates increase? Remember also to consider any tax implications in making the calculations – this is another area where the advice of a franchise-experienced accountant is vital.
The bank will also look at how much money you are prepared to put in yourself; the security you can offer; your financial record of accomplishment and business acumen; and other factors if applicable.
In certain exceptional cases with proven systems where the equipment or stock lends itself to that approach, they may also lend against the value of the business itself. This can reduce the total security required but, because of the many variables involved, it will be judged on a case-by-case basis.
points to remember
Before committing yourself to any purchase, you should determine how much finance you require and involve your banker in the decision-making process on the required amounts, terms, timing and mix of financial solutions that will best meet your needs. Remember:
• Your bank values your custom and wants to make it as easy as possible to obtain finance for the right business. The good news is that, in the case of franchising, funding will be available for profitable businesses from strong brands.
• Familiarise yourself with the processes and information required to obtain finance. This will help you to ask the right questions when buying a business, save a lot of time and effort and put you in a much stronger negotiating position.
• The information that you need to assess the viability of a business opportunity is the same information the bank needs to process a finance application. Do it once and do it right. Use expert advice where necessary.
• In obtaining finance, you are entering into a long-term financial relationship with your franchise banker built on trust. This makes it important for the bank to look after your interests.
• Look at the services and added value that your bank can offer over the longer term after obtaining finance. You are in this together for the long haul and informed relationship banking can make a huge difference to the eventual success of your business.
The information contained in this article is intended as a guide only and is not intended as an exhaustive list of matters to be considered. Persons entering into franchise agreements should seek their own professional legal, accounting and other advice.
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