Below is a summary of our guide “Finding Finance for your Franchise Purchase”. Download the full guide.
You’ve considered your options, done your research and finally homed in on the franchise that’s perfect for you. Now comes the question of finance – how will you cover the costs associated with acquiring the business and running it until you’re making a reliable profit?
The right lender
“If you need to borrow, you really only have two options – a private lender, such as a friend or family member, or a bank,” says Rod Nuttall, former national head of franchising at CBA who is now principal of Biz Loan Connexion, a finance broking firm.
Every bank works with a slightly different set of guidelines and every franchise system has different characteristics. You also have your own unique set of financial circumstances, so it’s important to find the right match. You can research all of your options or ask a broker for help but, in the end, all banks will want you to meet the same basic criteria.
“They need to feel confident that you’ll be able to repay what you borrow,” says Nuttall.
Three things the banks want to know
1. Are you capable of running the business successfully?
Buying a franchise isn’t a guarantee of success. Banks will want to know about:
- the business opportunity;
- why you want to work in that business;
- what makes you think you’ll succeed.
2. Will your cash flow cover your expenses?
Not all banks demand a business plan but providing one could work strongly in your favour.
“A good business plan with solid financial projections and appropriate assumptions shows the banker that you understand the challenge of going into a business venture and that you’re serious about doing your research,” says Nuttall.
Preferred lending
Some banks have a preferred lending arrangement with accredited franchisors.
When your franchisor is accredited, the bank already knows all about the business you want to buy so you won’t need to provide as much detailed information. You may also have a wider range of finance options.
3. How much do you have at stake?
Investing your own assets doesn’t only reduce the amount of money you need to borrow, it means you have ‘skin in the game’ and a greater incentive to succeed.
“Generally speaking, a potential franchisee should plan to have half of their investment available in cash or equity in their property, plus an amount available for working capital and to finance their living expenses for a period of time until the business is established,” says Sharen Verrenkamp, acting national industry leader franchising at Westpac.
Good advice from the outset
An accountant with experience in franchising, and who understands the issues and challenges you will face, can facilitate the entire financing process.
“The right accountant will help you to gain a clear understanding of how much money you need,” says Andrew Graham, national head of business solutions at RSM Bird Cameron.
“When you’re negotiating with the bank, and particularly when a formal finance application is required, it’s important to have an accountant in your corner.”