last updated 10/08/2015
Westpac - What to Ask About Funding
last updated 10/08/2015
There are a host of factors influencing your decisions when buying a franchise, but asking the right questions will greatly assist in identifying the right, profitable business. At every meeting with the franchisor, your business advisors, other franchisees, accountant, lawyer and franchise banker, look to gather more detail than you did at the meeting before.
Although there are many aspects to franchising, business is ultimately about financial factors: risk and return, profitability, cash flow and capital gain. For this reason, there are some specific questions that you should ask of your franchisor, your advisors and yourself. It is important to get professional advice, but you should also make sure you understand the figures yourself. Use an accountant experienced in franchising (see the Westpac Directory of Franchising at the back of this magazine for suitable people) and ask him or her to assist you with cash flow projections which will assist you in understanding what makes the business profitable and the funding required.
The first question should not be, ‘How much can I borrow?’ but rather, ‘How much can the business afford while still delivering a decent living and return on my investment?’ This is vital to your proposed purchase - if you get it wrong then you will be over-stretched and over-stressed, the business will under-perform and you may never achieve your ambitions. For this reason, you should always be honest and open with your advisors and your bank. The following questions will help you answer this first, most important one.
What Do You Need?
- How much money do you require? Franchise adverts can be very confusing because franchisors do not all use the same assumptions. If the capital requirement is listed as between $90,000 and $120,000, 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 does it only reflect the cash equity required? How much extra would you need to borrow?
- 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.
- Can you fund against future cash flow? This is relatively common when setting up a new franchise from a well-established franchise system with a proven brand. Cash-flow lending could lower your equity requirement and mean you could afford a much larger business than would be the case with setting up a normal small business. The value of this would be determined by the debt servicing capacity of the business and the reputation and business model of the franchise system in question.
- What is an appropriate term for the funding? Normally, short-term funding would not be suitable to fund the business and would be more appropriate for working capital. Try and match the funding to the asset and take into account when it needs to be replaced - for example, in the case of a retail outlet, your store will need a total refit at some point and you may need additional funding at that stage.
Where Do I Get Funding From?
Assuming that you need to borrow funds for your new business - and most people do - then you need to decide where that money is going to come from. Because you are buying a franchise, you should be able to tap into specialist expertise to help you.
- Does your bank have a specialist franchise division? How do you contact them? Generalist business managers within banks normally require 100% security, but franchise specialists can often offer better terms if they know the system. Does your bank have the franchise knowledge, benchmarking and strategic relationship with your chosen system to deliver real added-value lending as well as transactional benefits? If the franchise is a new one and your bank is not familiar with it, they will want much more information from the franchisor.
- Can your banker add value with the initial lending based on their real knowledge of the business model and benchmarking? Do they also demonstrate ongoing commitment to the system beyond the initial package? An example would be offering franchise-specific transactional and personal banking packages for the system. If they do this, every time the franchisor negotiates more benefits for the systems based on the volume of franchisees already banking with the bank, you will automatically receive those benefits as well. This can be of considerable value, especially if you were an early franchisee of the system.
- Ask about your business’s day-to-day transactional needs such as accounts, overdraft facilities, online banking, EFTPOS, credit card facilities and so on. A lot of people tend to concentrate on the initial lending but forget about their ongoing transactional banking needs. These directly influence the bottom line.
These are only a few of the questions you need to ask. Your specialist franchise banker and accountant will be able assist you with all the factors involved, including offering different funding options, transactional solutions and suggesting optimum funding structures for your specific business, but the more questions you ask, the better the results you will get. If you don’t understand the answers, if you need more detail or if you don’t believe the enquiry has been answered properly, say so.
Never feel guilty for asking lots of questions. Accountants and bankers deal with a lot of different clients at a lot of different levels of understanding; they tend to know their own businesses, but they don’t know what you know and don’t know unless you ask. Before you buy a franchise, your job is to make sure that you are fully aware of what’s involved. Your money, your livelihood and your future are at stake - if you go in with a clear understanding of that, with the best advice possible, you are far more likely to achieve the ambitions you set yourself.
Daniel Cloete is the National Franchising Manager for Westpac. You can contact the Westpac Franchise Team on 0800 177 007 or Email: email@example.com
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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