Matching the Finance to the Franchise
There is a dizzying array of franchise options out there
It’s easy to get swept along on a wave of excitement at the possibilities once you can picture yourself as a successful entrepreneur, but let’s inject a dose of realism early on: a franchise is a financial commitment as well as a dream. You need to think about what you can afford and how.
Don’t even think of allocating every single dollar you can get your hands on. If your money is all tied up in the business, what will you live on and how will you deal with the unexpected? Make sure that you fully understand the financial impact of buying the franchise, not just the initial fee but also the costs of any equipment, initial inventory, recruiting and other startup costs. Then, make sure you have enough left to pay your way through the critical first few months. Revenue should start flowing in pretty quickly – which is one of the many advantages of franchises over traditional startups – but don’t count on it being instant.
When you’re ready to apply, you’ll need to put together a comprehensive picture of your personal finances including your net worth, tax returns, credit ratings, and perhaps even your monthly outgoings. Identify which of your assets are mortgaged or tied to a loan and those that you own outright. Many lenders and franchisors will assess the extent of your unencumbered equity. These aren’t just hoops to jump through; they’ll also help you identify the franchise that is the best financial match for you.
Now you’re ready to arrange your funding. Franchisees generally use money from a combination of sources. As a rough guide, you could be expected to find up to 50% of the investment from your own equity with the remainder in loans. Again, this protects you because it’s never a good idea to start a business saddled with hefty loan repayments.
The way to approach a bank for help to finance a franchise isn’t much different than applying for any other business loan but with the advantage of the franchise brand. If you already have a good relationship with a bank – either as a personal or business customer – that can give you a head start.
You need to show a solid, detailed business plan putting forward a positive but realistic appraisal of your prospects in the short and medium-term. Draw up a projected balance sheet with statements of income and cash flow. Try to construct it so you answer the bank’s most obvious questions: What’s the potential customer base? How is the sector performing? Who are your competitors? Anticipate potential risks or weaknesses and show that you have a plan to deal with them.
Have a plan B or even C
It’s also important to posit a few worst-case scenarios to demonstrate that you have a plan B or even C. Equally, there’s no harm in speculating on the effects of over-performance. Be honest and confident when you’re presenting your case. If you know your facts and figures and you believe in yourself, you’ll come across as a good investment prospect.
In addition to what any lender will want to know, for the sake of your own financial security and peace of mind, it’s essential to plan for unexpected or hidden costs, like deposits to utility companies, interest payments, fees for lawyers and accountants, insurance and licenses. Too many otherwise sound startups fail in the early months simply because they run out of money. Guard against that as a priority.
Finally, be organized. Leaving financial planning until the last minute will not inspire confidence. You need to demonstrate your seriousness and professionalism to your lender as much as to the franchisor. Ultimately, both of them are making hard-headed business decisions on whether to put their faith and financial trust in you. Impress them both from the outset, and the sky really could be the limit.