Financing your franchise purchase
For some people when they are thinking about buying a franchised business the first thing they do is talk to their bank to get an indication of how much they can borrow.For others they find the business first then talk to the bank. There is no right or wrong way and whichever way you choose you need to make sure you give yourself the best chance of securing the finance you need.
The process does not need to be daunting so here are a few tips to help you get the most out of your bank. The order in which this occurs will vary depending on your situation but make sure you cover it all:
-Talk to your bank as early as possible in the process. This way the bank can give you an indication of how much you could borrow. Remember this will not usually be a definite ‘yes’ at this point but it should give you confidence to know what is within your financial capacity.
-Once you have found the perfect franchise you should prepare a business plan of the business and how you will operate it. This does not need be lengthy but it should include details of type of business, location, the market it operates in, key staff, premises and importantly a resume of the skills you possess to successfully operate the business. If the business is part of one of the more well known franchises, chances are the bank will already have good knowledge of the franchise.
-Get in touch with a chartered accountant, preferably one that specialises in franchising, to help assess the financial viability of the business. The franchise may be able to recommend some accountants who are familiar with the franchise or perhaps speak with existing franchisees to find out who they use. The accountant will look at historic performance of the business and help prepare the financial projections and budgets for the business under your ownership. This information is vital and will need to be provided to the bank to enable it to assess the capacity of the business to repay the finance you need.
Engage an experienced franchise lawyer to help you demystify the contents of the franchise agreement. These agreements can be very complex and you must ensure you fully understand your rights and responsibilities under the agreement. The bank will want to know you have taken professional legal advice.
Provide a detailed breakdown of the costs associated with buying and setting up the business. It is preferred you supply a copy of the sale and purchase agreement as this will clearly identify the price you have agreed on and how it is broken down in terms of stock, plant and equipment and goodwill. In addition, you should list down how you intend to pay for the business and what security you can offer the bank to secure the finance.
Find out as much as you can about the business, you will start paying close attention to KPI’s (key performance indicators) within the businesses profit and loss statements/forecasts. Historic data is gold. Forecasts are only as good as the assumptions behind them. Do not get starry eyed with forecasts that provide no relevant/coherent assumptions.
Is it a ‘good’ franchise system – consider such factors as length of time operating, number of franchises, a strong brand, a proven product or service, good training and support, and good MIS (management information system).
Does the price present fair value and return on investment? Is the current demand for the product or service mature or growing – will it last?
Banks which specialise in franchising like ASB see franchising as a good way of lessening the risks associated with start up businesses. In some cases the Bank will lend on more favourable terms and criteria to the more established and proven franchise systems. This could mean you may not require as much capital or equity to put toward the purchase price. Alternatively it may enable you to consider other franchises or perhaps a larger business within the franchise system you have chosen.
There is so much more to running a successful business than just finance. ASB can help with all the steps listed in this article, as well as our specialised finance packages which include all transactional matters like credit card acceptance and EFTPOS, robust leading edge online banking services to effectively manage your cash flow, and securing your future through adequate and relevant insurance protection.