by Westpac New Zealand
last updated 30/03/2020
Get The Right Funding
by Westpac New Zealand
last updated 30/03/2020
Daniel Cloete from Westpac explains how working with a specialist franchise banker can help you make the right decision
When looking to buy a business, wise investors look at a host of factors. Among the top priorities should be the risk of investing in a business; the financial performance of the existing or new business; and the ease of being able to fund the business purchase. You may also need to address whether to buy a totally independent business or consider a franchised or licensed model.
There are advantages and drawbacks in any model, but with full-format franchises from the stronger brands benefits may include a proven business model, a well-known name, group buying power, coordinated advertising and marketing and an exclusive territory. Other advantages can include franchisor support and benchmarking against other franchisees in the system. In some systems, there’s also the potential to develop your business through owning multiple outlets.
There can be benefits on the financial side, too:
1 Even with a new franchised outlet, you should have a known financial input including initial costs and working capital.
2 By comparing the financial performance and KPI’s like Sales, Gross Profit Margin, Labour Cost, Rent and ROI (Return On Investment) with others in the same group, you can develop a much better understanding of the business, lower the risk and facilitate information that can assist with a business plan and funding application.
3 For well-known and accredited franchise systems, it may be possible to fund against the projected business income with new set-ups for proven systems.
See your 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 can essentially be a straightforward process, using the same information you need to assess the business yourself. You should therefore consult a specialist franchise banker and see them as an ally. A good specialist already knows most of the franchises available and can quickly see if claims (like income or expenses) are realistic. They can also offer different funding structures, which make the best use of your equity.
One thing to remember is that it is you who are the bank’s client – not the franchisor. It is therefore in the bank’s interest that you should join a stable, profitable franchise system without paying too much for the business.
This does not mean you should not do a proper assessment yourself. Your bank is going to expect you to have an intimate knowledge of the business that you are planning to buy and its financial position or prospects. This is in your interests, too: by doing your own research and using experts like franchise accountants and lawyers to do the specialist work, you can increase your chances of finding the right business to suit your needs and ambitions.
What will your banker require from you?
One of the first questions is: what information does a bank require to process a prospective franchisee’s application quickly and effectively? Here are the basics:
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, it will also want to see the historical financial accounts. In the case of a new franchise, the franchisor may provide cash flow 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 can give a good indication of possible performance.
If done properly (with the assistance of your accountant if necessary), 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, 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 A business plan need not be elaborate in most cases, but is a very worthwhile exercise. It will help you to understand the business better, focus your thinking, and 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 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.
Your 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 (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 will also 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.
What will the bank be prepared to lend you?
The important 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?” Neither you nor your bank would want you to be unsuccessful because of being over-geared. The current historically low interest rates can also easily lull you into taking on too much debt – remember to look at what happens if interest rates increase. And make sure you consider any tax implications in making the calculations – this is another area where the advice of an accountant is vital (see page 48).
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.
Points to remember
Before committing yourself to any business purchase, 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.
- Familiarise yourself with the processes and information required to obtain finance. This will help you to ask the right questions, save a lot of time and effort and put you in a much stronger negotiating position.
- Get the information, do it once and do it right. Use expert advice where necessary.
- 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.
Finally, look at the services and added value that your bank can offer over the longer term after obtaining finance. Think of it this way: you are in this together for the long haul. 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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