It is of course, understandable that franchise cost and franchise financing can be two major challenges, or worries, that you face when you make the decision to be an entrepreneur in the franchise environment. Let’s look at how you can address some of those issues and concerns with information that will assist you in making an overall solid franchise investment decision.
Franchise financing and franchise cost should never be put near the end of your decision making process. You should address those key areas up front and be armed with the right information on how the industry finances a franchise. Many clients, somewhat mistakenly, think they will receive franchise financing assistance, or even the financing itself from their franchisor. Nothing could be further from the truth – you should simply focus on the fact that the franchisor is in business to sell units and grow their business, not put capital into your venture. That being said we hasten to say that almost all franchisors can be a valuable tool in the franchise finance arena in a number of ways.
So how can you use the franchisor itself as a tool for your financial planning around your venture? Follow a couple basic rules – review the franchise disclosure documents carefully for any financial data that will help you make a better financial decision. Also, ask for franchisee testimonial and contact info – if possible talk to some franchisees in the chain and ask them about their finance strategy hen they acquired the business. Also cover off if the financial expectations they had around the business in fact materialized. In some cases your franchise lender may wish to obtain info on the franchisor and their overall financial status. This generally is not required with well known brands.
In the challenging economic environment we are currently in it is important to deal with an expert to ensure you have the right financial strategy in place – your lawyer or accountant might be familiar with a franchise financing expert in Canada who can more quickly assist you.
In order to finance a franchise successfully in Canada we recommend to all clients that you have an appropriate mix of debt and equity – equity is of course the funds you put into the business yourself, and debt is the franchise financing itself . Typically we see clients putting anywhere from 10-50% of the franchise cost in as owner equity. This varies per type of business, and whether the business is somewhat asset based or service based.
You need a business plan and financial projection! We can’t be clearer than that. This valuable tool serves a number of purposes – it shows the lender you have thought out the ‘ financial ‘ aspects of your business – and quite frankly it should solidify in your own mind that you have a solid business opportunity .
Carefull attention to revenue projections, costs, and debt servicing should all be a part of that plan. Typically you should have the plan prepared by a professional and we don’t think you should pay more than 750-1000$ for a decent plan. Don’t spend thousands on a business plan – that’s a waste of money in our opinion.
So how is the franchise cost financed in Canada? As we said the key component is your own personal investment .After that a huge majority of franchises in Canada are financed under a special government program that is technically called the BIL or CSBF program .Most clients typically refer to the program as the Government Small Business Loan. Ensure you are aware of the requirements and that you can meet the requirements. It is recommended you speak to a trusted, credible and experienced advisor in this area who often can help you put together your package, guarantee that you meet the requirement and at the same time work with you, the lender, and the franchisor to accomplish every ones goal – which is of course – getting you approved for franchise financing !
It is rare that one financing will cover all your total financing. Many of our clients that require some form of asset financing with their franchise investment utilize an equipment leasing or equipment financing option. This makes sense from a variety of reasons – it spreads out your credit so you aren’t concentrated with one lender, it is easier to get approved, and you can use the government loan to cover a lot of the leasehold costs that otherwise might not be able to be financed .
In franchise financing you should categorize your financing needs in three areas – soft costs, hard asset costs, leaseholds. Soft costs might be things such as the franchise fee, hard costs might be signage or POS computers and software, and leaseholds might be painting, pluming, air conditioning, etc. It is absolutely critical to segregate these into separate categories and ensure you have a financing strategy in place for each one. You do not want to finance all your hard assets via the government loan and then find out you can’t get leasehold financing from anyone else.
So whats our bottom line in franchise cost and franchise financing. Its simply do your homework, solicit the help of a franchise finance expert, prepare a solid business plan and segregate your costs so that you can finance them in the right manner. Completing all that should put you in a perfect position to execute on your franchise ownership dream.