last updated 30/03/2023
Seize The Moment
last updated 30/03/2023
Sujam Ratnayake from Westpac explains how to get funding for buying a franchise
In the current economic environment with rising interest rates, a red-hot labour market and high levels of inflation, there are many advantages in choosing to buy a franchise rather than an independent business. As an experienced banker, I can say that banks are still keen to lend to good profitable franchises in resilient industries.
For buyers, it’s important to know how to organise your business funding properly. Choosing a bank that understands the franchise model can significantly improve the chances of getting what you need. Common reasons for needing finance include:
- Buying an existing business
- Setting up a new business
- Asset finance – for expansion or growth
- Working capital finance
- Restructuring existing debt
- Management buy-out
- Rental or other bonds
- Fit-out requirements by mall or franchisor
Funding the purchase of an existing business may be straightforward, as there will be historical financial reports to support your application. But funding a brand-new business with no historical data can be challenging if your banker lacks proper knowledge of the franchise sector and doesn’t have the benchmarking information which enables them to assess the opportunity properly. An experienced franchise banker and accountant can assist you to overcome this barrier.
What information will you need to apply for bank funding?
When approaching a bank for funding, it’s good to be prepared with the information you need before your first meeting. Some of the basic requirements are given below: you’ll find that some of this is the same information that you will need to examine with your accountant as part of your due diligence process.
- For an existing business, the last 3 years’ financial reports from an accountant. If possible, look at pre-Covid figures as well - it may give a fuller picture;
- Up-to-date management accounts, if available.
- For a new business, a breakdown of the set-up costs;
- Business plan together with a financial forecast;
- Copy of the Sale & Purchase Agreement if available;
- Copy of the Franchise Agreement with terms if available;
- Copy of the Lease Agreement if available.
Some other important information to find out before applying for funding is:
- When does the franchise agreement expire? Does it have an option to renew? For how long? How much is the renewal fee?
- If there are premises, when was the last time the store had an upgrade? When is the next upgrade due, and how much will it cost?
- When does the lease expire? Does it have an option to renew?
- Do you need a rental bond for the lease? How much?
Finding a deposit to purchase a business
New Zealand’s housing market continues to drop, with the REINZ house price index suggesting overall prices are now down more than 11 percent from their peak in November 2021. Because many customers use the equity in their home as security to purchase a business, this can create issues.
This is another reason to use a banker who understands franchise business lending. It is possible to use your business equity to support funding up to a certain percentage of the purchase price, subject to the bank’s business lending criteria and approval. In this case, you will only need to bring in the balance of the deposit to purchase the business.
This can reduce your initial deposit requirement considerably, allowing you to improve your cash flow for the business. At Westpac, we have accredited many franchise systems and are able to assist you with these types of complex lending requirements.
Funding a growing multi-unit franchisee
If you are already a successful business operator, there are real benefits to be gained by growing your business through becoming a multi-unit franchisee. Many large franchisors are keen to provide opportunities to their existing franchisees to grow. This allows you to achieve improved economies of scale – eg. by splitting staff over multiple outlets – and potentially higher returns.
In this market, it can be a challenging task to fund multi-unit growth, but an experienced franchise banker may be able to lend up to a certain percentage against the new business, plus use the equity you have built in the existing business, to fund the entire expansion without you having to bring in any new capital. This is, of course, subject to the support of the franchisor; the profitability, affordability and performance of the businesses; and meeting the lending criteria of the bank.
Get in touch
While there are always risks inherent in economic cycles, keeping your finger on the pulse and ensuring you have the right financial advice could help you to capitalise on some golden opportunities right now.
The availability of system-wide data can make franchised businesses a very attractive and supportive option. Westpac franchise managers around New Zealand have been busy working with customers on both an individual and network basis, so don’t hesitate to contact your local specialist franchise banker for assistance.
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.
For more information and advice on buying a franchise get your FREE copy of Franchise New Zealand magazine.
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