Franchise Financing (Pt II)

Date AddedOctober 12, 2009 12:20:17 AM

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Continued from: Franchising Financials (Pt I)

START-UP COSTS

As part of the due diligence phase, franchisees should have researched and given serious consideration to all the potential costs involved with starting up the business.

There are two routes that a prospective franchisee can take when looking to purchase a franchise business: setting up a totally new franchise outlet, or buying into an existing site. Each option has its own unique financial considerations, and there are also a number of standard costs that all new franchisees will incur across the board, whether they choose a new or existing site.

Franchise fees and pre-opening costs - which the franchisor will be able to outline in the Franchisor Disclosure Statement - and also costs associated with the professional services required (such as lawyers and accountants) need to be considered. It's worth keeping in mind that accommodation costs will be incurred whilst undertaking compulsory training and also key person insurance.

To ensure the most appropriate type of insurance cover is taken, it's advisable to seek professional advice early on.

A new franchise site is likely to face a few additional set-up costs, including business registrations and licences, and a prepaid rental bond equating to three months' rent - typically required by most landlords.

An existing business will also bring its share of costs, including potential equipment upgrades and possible expensive site re-fits if the business is old and the system is updating its branding.

CONSIDER CASH FLOW FROM THE START

Cash flow management is a discipline which new franchisees will need to master before they open the doors to their new business. This will help them start out on the right foot and prepare the business for success in the future.As mentioned previously, conducting thorough research prior to opening is the first step in setting up any successful small business and franchises are no different. A key part of this set-up process is a review of the business' cash flow projections. This can be assessed by looking over the current cash flow situation of the business if it is already established, and seeking out the financial status, track record and growth strategy of the franchisor.

This information will help form a critical element of the business plan as, within it, a financier will expect to see a sound understanding of the cash flows required to protect their investment. Unrealistic or poorly researched cash flow projections can result in reduced funding or even, in some cases, funding refusal.

Franchisees are likely to struggle to get their business off the ground if they start out life undercapitalised, so the importance of this phase cannot be overstated. By fully researching the details, franchisees can avoid major financial shortfalls down the line.

It is far easier to obtain money for a well researched and thoroughly planned start-up than it is for a struggling franchise that hasn't met projected expectations.

If cash flow is considered from the early planning stages, the prospective franchisee will be in a good position to manage the business' cash flow situation, once the cash register begins to ring.

To be continued. See Keeping Records (Pt III)