5 franchise finance essentials for new business owners
Research and due diligence are at the heart of good preparation for a franchise purchase, and it’s no different when prepping for the franchise finance aspects.
Take some simple steps to prime yourself for success as a new franchisee because the foundations will be crucial for the business you build and the achievements you celebrate.
Here are five franchise finance essentials you need to consider and action …
1. Check your finances
Overcome the first hurdle to getting franchise finance by really understanding your financial position.
Taking the time to honestly assess your assets (your house) and your debts (your mortgage) will give you a better chance of success. This probably means doing a bit of research yourself on the value of any property you own, or part-own; perhaps get a fresh valuation so you are confident in your debt and asset ratio.
Also take into account your current standard of living, and what it costs to maintain it. We’re all guilty of underestimating our expenses and that can cause havoc with plans. So be brave, work out the true state of your bank balance, and then be prepared to be honest with any financial institution.
2. Stick to your budget
If you have been brutally honest about your current finances, you’ll have a good idea of how much money you can truthfully afford to invest in a business.
If you have substantial savings because you’ve been planning for this move for some time, congratulations. Just remember to add in the costs of paying back any further loan you might need to supplement your savings, and the incremental fees and costs that are part of any purchase.
For franchise buyers with limited savings, some form of financing loan (through a bank or an alternative lender) is likely to be essential. Again, it isn’t just the obvious upfront costs you will need to source funds for. There will be upfront legals and business costs. Working capital is crucial for a business to tide you over in the early days, so that needs to be accounted for too.
It’s important to evaluate any franchise opportunity with these extra costs in mind.
There are great franchise businesses at all income levels so avoid the temptation of a brilliant business opportunity that is just out of your price range. The dangers of over-stretching the budget from the beginning are considerable. Lack of cash flow is a common cause of small-business failure. A franchise can be a brilliant model, in a great location, but without the funds to pay franchise fees, a lease, bank loan, staff and suppliers, there isn’t a business.
3. Be greedy …
About the numbers! No, we’re not advocating a cash-crazed approach to finding a franchise that will give you more profit at any cost. Rather we’re suggesting you become greedy about getting as many financial figures and statistics as you can from the franchisor. There is an obligation for franchisors to divulge some information in the mandatory disclosure document, but any further level of financial transparency is entirely at the behest of the franchisor.
Take the same approach with the franchisee you are purchasing the business from, or a similar location and sized franchise if the site you are investing in is brand new. Good financial information is gold and will play an important part in your business plan.
4. Seek advice
Some of this hard work around the financials you will have to do yourself, but it is possible to share the load and gain some invaluable insights by turning to a franchise-experienced accountant.
This is particularly relevant if you’re a first-time business owner. Why not tap into expert advice from someone who can point out anomalies in the figures you have collected, who can make an assessment about financial viability, and who is acting on your behalf. It is worth spending the money on an accountant or business adviser who is a specialist in franchising because it may save you money in the long term.
5. Find the funds
When you are confident that you are clued-up about the numbers, you know what your costs will be, and you have a good sense of how you will make money in the business, then it’s time to approach the bank or other financier with your business plan.
This is when it’s really important to be as transparent and honest with your banker as you would expect your franchisor to be with you. Give your bank the confidence that you can make this business work: the finances stack up; you have a good business plan with clear goals; you have a contingency for how to correct any slow periods in business.
Franchise finance tips
It may be that your chosen franchise is accredited with a bank, which can make the financing process much easier.
However, the number of accredited franchises is quite a low percentage of the overall brands in Australia. If the franchise you are considering is registered with The Franchise Registry, which encourages transparency and compliance, the lender may have easy access to information about the brand which will simplify their job of determining the outcome of a funding application.