Franchise Financing becomes critical to a prospective franchisee after he or she has made their selection to purchase a franchise. At that point clients always ask us – ‘How does franchise finance work in Canada?’
Naturally a large amount of time hopefully has been spent, as well as care! , in selecting the right business investment opportunity. Only one simply question remains, how does one pay for or finance the business.
One of the key aspects of that question is the type and size of the business you are purchasing. In some cases you are even considering perhaps purchasing an existing franchise from a current business owner who wishes to move on for whatever reason. (It is sometimes good to know why that owner wishes to sell of course.)
Size and type of business dictates the amount of financing you will need in Canada. We could generally lump franchise business models into two categories – service related businesses, or asset intensive businesses. Let’s choose a quick example – if you are buying a mobile furniture repair business all you need is a truck, some products and inventory, and you are in business. However, the purchase of a major restaurant franchise could involve hundreds of thousands, sometimes millions of dollars in leaseholds, assets, equipment, and on occasion even real estate.
So if finances are limited that might be one of the factors that you might want to consider focusing on a service business that is not asset intensive. Naturally just the type of business you purchase shouldn’t solely be driven around what you can afford; there are other factors to take into consideration also. These might include your personal interest in the industry, or even more importantly, your expertise. Example: Not everyone is cut out to be a restaurateur and deal with the public all day.
When financing a franchise you should also focus in on two key points – what funds do you need to acquire the business, and , as importantly, why financing is required on an ongoing basis for what finance people term as ‘ working capital ‘ . This would include ongoing investments you need to make in inventory, accounts receivable (if you are selling to a business) and in some cases equipment.
There are a handful of key options you can utilize to finance your purchase of a franchise. In Canada we can break these down into a few key components. The first component, and it’s a requirement also, is your own investment of capital into the business. No one will finance a business where the owner has not put in some capital. The majority of franchises in Canada are financed by a unique government guaranteed loan that is technically called the BIL programme. This program has attractive rates, terms and structures, but at the same time requires a lot of careful planning.
Because franchise financing in Canada is a niche industry we encourage clients to work with a respected, trusted, and experienced advisor in this area. The assistance you will get with cash flow planning, financing options, and access to franchise capital could make or break your overall success.