Franchise finance; how early is too early to talk price?

By Nick Hall | 26 Jul 2019 View comments

The parliamentary inquiry has come and gone, and with economic conditions continuing to tighten, franchise finance is proving to be a thorn in the sector’s side.

For franchisors looking to bolster their network, adding fresh blood to the mix is a critical component. Not only does it provide a fresh set of eyes and an exuberant outlook, but incorporating new entrants demonstrates an outward confidence in the brand.

However, evolving economic conditions and a slate of bad press have damaged industry sentiment. The result of which has seen big banks shy away from lending, making access to franchise finance more difficult than ever.

Current complications

It isn’t just the franchising sector that has had its troubles over the past 18 months, however. The Hayne Royal Commission put the brakes on opportunistic lending, prompting a far more conservative approach.

Couple that with a downturn in real estate prices and a record level of household debt, and access to finance quickly becomes the canary in the franchising sector’s coal mine.

However, Jason Gehrke, founder of the Franchise Advisory Centre believes the issues currently hindering network growth have been brewing for some time.

“These are headwinds that have been building for many years and they are now coming to ahead,” Gehrke said.

“The Australian economy is beginning to look a little wobbly and we’re about to enter a period where some economists suggest there could be a recession coming.”

So as lending continues to tighten and the pool of potential candidates shrinks, franchisors may find themselves in retention, as opposed to expansion mode.

When to address franchise finance?

As with all franchise recruitment, the issue of price will inevitably be a determining factor in your prospective candidate’s decision to purchase or not.

With franchise finance access more doubtful than ever before, some franchisees can view investment cost as a barrier too burdensome to cross. Recruitment managers may be apprehensive to reveal costings and fees out of fear of scaring a potential candidate away.

However, Soul Origin national franchising manager, Sally Nathan advocates just the opposite.

“We like to be upfront and transparent with regard to finances immediately,” she said.

For Soul Origin, franchise expansion has come quickly. Since launching in 2011, the café and QSR concept has grown to more than 100 locations across Australia. However, Nathan admits that even for a fast-growing national business, lending has tightened significantly.

“Access to finance has really shifted in the last 18 months; it’s the biggest challenge in the franchise space,” she said.

“For us specifically, being a bricks and mortar retail business, we face additional challenges, in retail leases and landlords.”

Throughout the course of the parliamentary inquiry, and indeed the months following, a number of franchise brands have been accused of misleading or deceptive behaviour. With added scrutiny over representations made by recruitment agents, franchisors would be wise to implore a process of transparency.

Nathan said that in order to remain transparent and protected, the earlier you talk franchise finance; the better.

“My advice would be to have that conversation as early as possible and drip feed that information throughout the process,” she said.

“Our finance check is actually based on a bank loan application, and we do that for two reasons. Firstly, because it is incredibly thorough and secondly, because it gets the franchise partner in the mindset of what information they need to prepare.”

How to alleviate franchise finance concerns

Soul Origin’s approach to preparing prospective candidates is a proactive one.

Where previously, franchisors may have invested time and effort into potential partner only to have them denied access to funding, Soul Origin addresses finance from the outset and throughout.

Furthermore, franchisors are being encouraged to prepare their own figures for the future. Rather than focusing on how many units are operational, provide lenders with a detailed plan of future openings and sustainable growth.

Fewer bank accreditations are likely to slow progress on the expansion front, but that doesn’t mean franchisors should go into lockdown. Instead, focus on being lender-friendly and provide stronger, more detailed information.

The wash-up on franchise finance

While economic factors are out of a franchisor’s control, there are ways recruitment managers can safeguard a prospective opportunity.

An open and transparent approach to franchise finance may reduce the pool of potential applicants, but in a climate quickly headed for recession, franchisors should focus on network quality over quantity.