A franchise investment you are considering in Canada is clearly one of the large business and personal decisions you will make . Is Franchise Finance available in Canada, and if it is, how does it work?
Clients are always asking us how franchise financing works . Typically, and hopefully !, they have made a substantial time investment in the selection of a franchise . This more often than not seems to be in the restaurant business, but in reality there are hundreds of other franchise opportunities available to the Canadian entrepreneur. Many prospective franchisees we meet have come from the corporate or ‘job’ world, and are looking to be independent business people in command of their own life and financial destiny.
There are two schools of thought in Canada around actual financing your franchise investment –
School of thought # 1 – Financing the business will be difficult
School of thought # 2 – Financing the business will be easy
I think the reader knows the answer, which is simply that there is a little truth in both statements. The reality is that there are only 5 methods of financing a franchise in Canada and the successful completion of a transaction is always one or a combination of those types of financing
What are the 5 types of financing for your new business – We will keep it simple. They are:
1. Government financing under a special loan program that suits most franchises
2. A working capital term loan
3. A vendor takes back from an existing franchisee you are buying the business from, or the franchisor
4. Equipment financing
5. Your own personal equity investment into the business (It can’t all be other people’s money)
There is a common perception by our clients that banks and lending institutions are reluctant to finance a franchise. That is not the case, but does involve showing that you are properly prepared. More often than not you should be spending time on the financial planning aspects of your business. This can be done by utilizing simple cash flow templates.
Sit down and estimate how much monthly revenue you will generate. Now, let’s look at expenses. We like to start off with an estimate of what you want to draw out of the business every month as a salary. Then simply go down a list of expenses that seem to be realistic in the new business. Typically those items include basic things like your costs of sales or inventory, advertising, wages to any employees, accounting fee, phone, utilities, etc,etc,etc,
At the end of that quite simple exercise you will be left with either a profit of a loss. We would suggest that if you are left with a significant loss that you reconsider the investment. However, if you are within the striking range of both paying yourself and creating a small profit then you probably have a reasonable franchise risk investment.
Other factors to consider are the amount of your own investment in the franchise. It does not make sense to over invest in the business, but there is a fine line between what you put in and what will then create somewhat of a comfort buffer in case sales don’t materialize as quickly as you want them to. Remember Murphy’s Law, which is ‘what can go wrong will’.
In summary, how to finance your franchise is often as critical as picking the right one. Plan carefully, assess which of the 5 options, on their own or together might work for your franchise acquisition, and sit down and carefully work out a realistic profit and cash plan. If necessary work with a trusted, credible and experienced advisor who can assist you in this unique area of Canadian business financing.