Financial Advice

by Westpac

last updated 18/09/2020

Finding Funding In Challenging Times

by Westpac

last updated 18/09/2020

Daniel Cloete of Westpac offers a banker’s perspective on franchising and the Covid-19 environment

The ups and downs created by the Covid-19 pandemic and the resulting shock on both the demand and supply side of the economy has severely influenced many industries. In some industries, and in companies that can pivot quickly, it has also created some opportunities.

Daniel Cloete Westpac
Daniel Cloete 

The economic upheaval has made it difficult to identify profitable businesses and increased risk. At the same time, it also opens up new opportunities at more realistic prices. Now, with borrowing costs at historically low levels, could be a good time to investigate some of these opportunities. But is funding available?

The Reserve Bank’s May Financial Stability Report talks in general terms about the availability of funding and the position around capital and liquidity buffers for banks. It says:

‘At the outset of the pandemic the banking system had significant capital and liquidity buffers, built up due to both regulatory requirements and several years of favourable banking conditions. These buffers can now be used to support their customers’ long-term economic future. Our economic stress test analysis suggests banks can continue to lend and prosper through a broad range of adverse scenarios.’

Business funding and franchising

The initial and ongoing support provided by well-structured and successful franchises results in franchisees having a lower failure rate than independent businesses. In addition, franchises often perform better than independents in recessionary times. But what has changed as a result of Covid-19? Is now the right time to take out a loan, or to invest a redundancy payment or the equity in your property in a franchise? Will it be hard to fund a new venture, or will the bank impose onerous lending conditions on businesses?

There is no doubt that you, your accountant and your bank want to look a lot more closely at the numbers than might have been the case a year ago. Many sources of funding may have dried up, but the funders who really understand the franchising business model will still be able to assist. 

One of the strengths of franchising is that you can compare results and projections through benchmarking against other outlets and get to a much more informed position before deciding whether to proceed. In this market, a solid profitable business that is built on a proven business model may present a lot less risk both to you and your bank than some highly speculative property investment that creates strong negative cashflow or a small, unsupported business.

Positive factors

With funding available, now could therefore be a good time for you to consider a new franchise opportunity or realise the dream of owning your own business. Despite the economic downturn, there are several factors that work in your favour:

•           Funding costs have dropped dramatically;
•           There is decreasing competition in some sectors;
•           Good staff may now be more available and affordable in your sector;
•           Good locations may be more readily available;
•           Rents may be more reasonable;
•           Initial rent-free periods can assist new businesses;
•           Landlords may be much more flexible and be prepared to 
make fit-out contributions.

Given these positives, the business model of your chosen franchise may stack up extremely well – providing the level of sales in the ‘new normal’ can support the profitability of the business the way it was originally designed to do. 

In addition, you may be able to afford a rather larger business than might have been the case before. The golden rule for business funding has always been not, ‘How much can I borrow?’ but, ‘How much can my business afford to make repayments on?’ With lower funding costs, your dream business could be more within reach than you thought. 

Buyer beware

Those are the upsides. At the same time, though, whatever type of franchise you are interested in, you need to carry out some very realistic ‘What if?’ worst case scenarios to ensure that you (and your banker) are comfortable with any specific risks presented by the particular business or industry into which you are entering, especially currently. 

Talk to advisors who really know the industry and specialist franchise accountants, lawyers and bankers. This is always good advice, but it is more vital than ever at the moment to ensure that you make the right decision for your future. Here are some key points to look out for:

•           It’s important to assess risk properly;

•           Getting the fundamentals of the business right, and understanding the particular franchise’s model, are more important than ever;

•           Do the numbers (with the right advisors) to convince yourself that this is a real opportunity;

•           The more correct (and up to date!) information you can supply your banker, the easier it will be to get finance;

•           Whichever the industry in which the franchise you are looking at operates, there are likely to be others in the same area. Some other franchises may have better fundamentals, like rent, funding cost, locations, buying power, etc. Shop around.

•           Do not overpay for existing businesses – their profitability may have dropped a lot in the last six months and the risk premium (the rate of return you should expect on your investment) would have gone up as well. In general, lower prices are being paid for small businesses at the moment. Of course, this may also mean you can afford an opportunity that was out of your reach last year.  

Opportunities abound

While the talk about the doom and gloom of the world’s economies currently seems relentless, it is also true that with every obstacle there is an opportunity. In New Zealand, we are not immune to the economic issues around the world, but it may pay to take a longer-term view. 

Experienced business people know that now can be a time of opportunity. If a franchise is well-structured, the numbers stack up and you have the ability to make things happen, it’s worth investigating your options. Many a good business has been started in bad times …   

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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