last updated 23/06/2021
Make An Educated Decision
last updated 23/06/2021
Daniel Cloete from Westpac has advice to help franchise buyers find funding
One of the biggest concerns for anyone in franchising is always whether or not suitable franchise buyers have access to finance. That concern was raised again in the latest Franchising Confidence Index from Franchize Consultants.
As a specialist franchise banker, I’d have to say that finance is certainly available and that buyers will find banks ready to lend on good business propositions – and at record low rates, too. For buyers, though, it’s important to understand what makes a franchise a good business proposition from their own point of view, as well as the bank’s.
Covid-19 has damaged some industries and opened up new opportunities in others. Corporate restructuring and an influx of returning Kiwis has increased the demand for profitable businesses in resilient industries. While some buyers will be well-capitalised, others will be looking for lower-investment franchises. Making a wise decision therefore requires buyers to consider many issues: which industry; which location; which franchise brand; and what investment level.
But how do you do this? The secret is to become an educated franchise buyer and ask the right questions, of the right people. There’s a lot of information freely available, in this magazine and on its website, from banks, the Franchise Association of New Zealand and professional service providers. Unfortunately, potential franchisees don’t always take the time to access this information, or to act on it if they do. As a brief introduction, then, here are the main points to look out for when you start researching an opportunity.
Industry and trends
Before considering any particular franchise system, you need to learn about the viability and trends in the industry you are looking at. For instance, our population is ageing and has less time because of career pressures, which means franchises delivering services are growing. People are demanding healthier choices in fast food, and more variety in casual dining. New migrants are creating new markets, as well as introducing new products and concepts into New Zealand. Education, leisure, beauty, health and fitness sectors are also changing. So ask:
- Is there a real need for this product/service?
- How stable is that need?
- Is the product/service still growing as a category?
- How are changing technology and online services affecting this sector?
- How large is the current market? The potential market?
- How much competition is there in the category already?
- How long have those companies been established?
- Are there several franchises to choose from?
- What do they have in common, and how are they different?
Question the franchisor
Having checked out the industry, you then need to find out about the franchise systems in that sector. The franchisors’ own websites will give you some of that information but finding out any detail will require you to contact the franchisor directly. They may then send you an information pack, but you will also want to ask questions about such issues as:
- Length of franchise term;
- Initial and ongoing fees;
- Total investment required;
- What you get for your money;
- Evidence of franchise support, training and reinvestment;
- Multi-unit opportunities.
See also an exhaustive list of 250 Questions to Ask Franchisors on this website.
How much do you need?
When looking to buy any business, the first thing to find out is how much money you require. This is not always straightforward: franchise adverts can be confusing because franchisors don’t all use the same assumptions.
- If the capital requirement is listed as between $150,000 and $200,000, what is included in this price?
- Does it include the franchise fee and, in the case of a new outlet, the fit-out? Does it include equipment, legal costs and accounting fees?
- Is the amount the total cost of your investment, or is it only the cash or free equity required? (which could be all or half of the full set-up costs).
The next important question if you want your business to be profitable is not, ‘How much can I borrow?’ but rather, ‘How much can the business afford to repay?’ while still delivering you a decent wage and good return on investment.
To know this, you need to look at the business financials, or see indicative figures from the franchisor, and discuss them with your accountant. With the current low interest rates this would be easier, but the term of the lending can still make a significant difference to your monthly repayments.
You’ll also need to know how much working capital will be required. This simply means the amount of cash you need to operate the business effectively. It is used to pay the bills; for example, wages and phones, and sometimes to carry stock until the business generates some income. Very few businesses can operate without working capital.
Armed with all this information, you can then start looking for the funding you need. Here’s another question: does your bank have the franchising experience to deliver real added-value lending to your business?
If your chosen franchise is a well-established one, using the right bank could enable you to fund against future cash flow, thereby lowering your equity requirement and enabling you to afford a much larger business than would otherwise be the case.
A specialist franchise banker can also assist you beyond the initial lending stage with ongoing transactional banking services that will directly influence your bottom line. If there’s a special package available for your chosen brand, it means that every time the franchisor negotiates more benefits for the systems, you will automatically qualify as well.
These are only a few of the initial questions. A specialist franchise banker and accountant will be able to assist you with all the factors involved, including offering different funding options, transactional solutions and suggesting optimum funding and tax structures for your specific business.
Other people to ask
Franchisees often love to talk about their business, and you can learn a great deal from them about the realities of running the business – see also 50 Questions to Ask Franchisees.
The final important person to talk to is a specialist franchise lawyer. They can explain your rights and commitments under the franchise agreement and check the details, including such things as the terms and conditions of the lease if premises are involved. It would be sad if you purchased a business only to find the lease expiring in six months or rent increasing so dramatically that the business is no longer profitable.
It’s worth it
Educating yourself at the beginning will give you the best possible chance of making the right choices. It will also help you get the funding you need to ensure your new business has every chance of success, both in the beginning and on an ongoing basis. Get good advice and act on it. It’s your money, your livelihood and your future.
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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