Financing a Franchise

This post was written by Michael on September 2, 2009
Posted Under: Entrepreneurial

Finance I don’t know how many times I’ve spoken to someone who is burning to start a business and often buying a franchise is at the top of their list.
It’s not the only option, of course. There are many business opportunities out there and probably the best source of them is the creative mind which can conceive a new product, service or business model. But the risks are very big in taking that approach and unless you have a absolute faith in your brand new concept, a less risky approach will be better.

Buying an existing business is often a good proposition. It should have already proved its worth, built up some goodwill and hopefully will be easy to manage, as all of the business systems will have been worked out.
But for many, a franchise holds the best promise for success. It’s understandable: Recognisable branding, plenty of exisitng success stories to hitch your wagon to, the promise of support and guidance from the franchisor. It all adds up to an appealing choice.
No matter which course you decide to follow it is most likely that you will require some financing.
How do you go about getting that?
Well, it is here that franchising offers some advantages. The franchisor will have had plenty of experience arranging finance for previous franchisees and after the first few meetings with you, they will almost certainly be able to advise you on the possible sources of financing and how likely you are to be able to get it.
Which is just as well, because franchises are expensive. There is the substantial upfront franchise fee, and recurring royalty payments and advertising fees.
To offset this large investment your franchise ought to be a “business in a box” and you will hopefully be able to hit the ground running and very quickly demonstrate to yourself at least, that it will be a success, (or otherwise).
So your first step in arranging finance should be to talk to the franchisors on your shortlist.
Here are some points:
Be prepared for some lengthy questioning on why you believe this franchise is suitable for you and why you believe that you will be able to make it a success.
Work out in advance your net worth. This consists of your cash in hand plus your assets minus your liabilities. For many people the family home will be a big percentage of their net worth.
Work out the liquid capital you have. This will be cash, plus savings, plus any readily convertible assets, such as stocks and shares.
Be ready to discuss your career so-far. Describe your managerial experience, if any and be ready explain why you are confidant that you will able to manage the franchise you are interested in.
You will need to demonstrate your committment to your new business by personally contributing as much as possible of your own funds to the start up.
Be prepared that any lender will require you have enough assets for 100% recovery of the loan amount.
You of course will need a business plan and here your franchisor should be able to help in a major way. If his business has been around for more than just a few years, he will have been down this path many times before, so he will know what cost are involved, what revenue you can expect and can help you with cashflow predictions.
Always remeber though that the final responsibility belongs with you. It will always be you who is resposible for the loan, the repayments, the revenue and the cashflow and for driving the business to the success you dream of.