last updated 22/09/2019
last updated 22/09/2019
Daniel Cloete from Westpac explains how buying a franchise can make funding easier
When people talk about the benefits that a franchise can offer, buying power is always one of the first that come to mind – as the cover story this issue illustrates. The ability of a franchisor to negotiate better deals with suppliers on behalf of a large group can provide franchisees with a significant competitive advantage.
Being part of a successful franchise brand makes a difference when it comes to banking, too. It can make getting funding easier, and make a significant contribution to your bottom line. That’s not just because of the size of the franchise, but because of the amount of data and experience a proven franchise system brings to the table. Looking at the franchise’s business model, track record and size allows the bank to:
1. Establish funding solutions based on the business model’s track record. These allow the franchise system to grow, with funding available to potential franchisees which might not be the case with a small independent business.
2. Develop transactional banking packages based on the volume of the whole group. This may include transactional rates, equipment finance, merchant packages, etc.
3. Offer personal banking packages. Franchisees in some systems are able to get personal banking discounts as part of the banking package for their group.
4. In some cases, for well-known and accredited franchise systems, it may also be possible to fund new set-ups against the projected business income.
For franchisors and franchisees, having the right information to present to the bank can therefore make a big difference.
The due diligence process
Anyone considering buying a franchise should do proper due diligence on the franchise system in general, the people behind it, and the prospects and/or history for the particular location or territory being considered. This is best done with the assistance of a specialist franchise accountant and lawyer to help you understand the financial numbers and risks yourself. Talking to other franchisees is an excellent way to learn more about the business model, culture and profitability in the group.
When looking at buying an existing or setting up a new business, it can be difficult to find industry figures or KPI’s against which to measure the financials or projections for the business. A franchise business model has many advantages that can make the due diligence process easier – and can therefore also make getting funding simpler.
In a well-run franchise, the franchisor should be able to give you the franchise system benchmarks based on real numbers from other franchisees in the group. This could include fundamental KPI’s such as the rent and wage costs the business model can afford as a percentage of turnover; gross profit margin; sales in comparable areas; and more.
In addition, franchisees should also enjoy the advantages of a proven business model; strong brand; on-going development of the product or concept; initial and on-going training and support; the aforementioned buying power and, importantly, good management information systems which collect and analyse all this data.
All of these factors support bottom line profitability and resilience. From the point of view of a franchise banker, they also make the business more fundable because they are quantifiable. That’s a great help when you are looking to buy, and may also mean a higher price once you come to sell the business.
By comparing (benchmarking) the financial performance and potential Return On Investment with others in the same (or similar) groups and independents in the same industry, you can develop a much better understanding of your proposed business. That will not only lower the risk, but also generate information that can assist you and your accountant to create a viable business plan and funding application.
That’s not to say that there will be no risk at all. External factors like normal economic cycles, industry changes and competition affect all sorts of businesses, including franchises. So do internal factors such as not understanding the management requirements or business model – not following the franchise operating system, in other words. Having the wrong funding structure and overpaying for an existing business can also increase the risk factors.
Something else that you should certainly take into account is your chosen brand’s reputation in the market and the financial health of the franchisor. Look at the franchise disclosure document, the franchise agreement, and ask the right questions from the franchisor. This is why you should use specialists who really understand franchising: accountants, lawyers and franchise bankers will have a great deal of background knowledge about the industry in general and, quite probably, your chosen franchise in particular. Make the most of their experience.
It’s also worth noting that, over the last couple of years, the multiples being paid for good franchise businesses have been going up. This is because of the financial success of franchises in many industries over the last few years; it’s also stimulated by people looking for better returns than the property market. If you’re looking at buying an existing franchise outlet, though, you’d be well advised not to over-pay – do proper due diligence and take good advice.
Experience shows that purchasers who put in time and effort in the investigation stage have a much better understanding of the key business drivers and relationships that make a business succeed or fail. If the process is done well, and with the right professional advisors, the purchase or establishment of a franchise business can provide worthwhile financial and personal benefits and can be highly satisfying. Good franchises offer many advantages, including the opportunity to access preferential funding or ongoing terms.
When looking at funding, talk to a specialist franchise banker who understands the franchise brand, its business model and also knows the transactional requirements of the system. This will not only enable you to source the most appropriate funding package, but also enable on-going support from your bank after buying the 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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