Clients ask us what are the critical requirements they need to to complete a successful acquisition a new or existing franchise. Many entrepreneurs feel they are obligated or have a desire to purchase a new franchise, but there is often a business case that can be made to purchase an existing franchise -ie you can better validate proven performance claims, etc .
Buying a franchise, it goes to say, is clearly one of the largest decisions you can make as an entrepreneur . Of course there are a couple of different versions of the opportunity, as we noted .
– Purchase of a new franchise
– Purchase of an excising franchise that is for resale by current owner
– Purchase of an additional unit in your chain when you own one already – Ironically the Canadian Franchise Association CEO once told me that one of the great challenges in the industry is the ability of entrepreneurs to acquire and finance additional units once they have perfect an original location .
What tips and critical info do you need that will allow you to successful complete a franchise acquisition? Here are 3 key points/issue that you should be able to use and profit from :
1. Recognize up front that Franchise Finance is a very specialized type of financing – financing options are available but not unlimited – you need to know what they are
2. There is a chance for franchise financing failure if you do not have the proper fundamentals in place and are exploring numerous options at the same time – ‘flailing around is not good! We feel strong that it is taking much longer to get a financing completed, often weeks can be added to your initial timelines . So start the process early, as soon as you have made a purchase decision or executed a purchase agreement .
3. You might significantly benefit by using the services of a franchise consultant in the area of business financing
Lets review our point # 1 – Business financing is a challenge. Specialized financing in any area of business is a unique challenge because of limited options and a limited number of players. Players = lenders! If you accept business financing is difficult then you can imagine the severity of the challenge in the 20010 global economic crunches that we still seem to be in. Small business has never been more challenge to acquire the proper financing .
So is it all negativity and bad news. Not necessarily of course if you are informed and prepared. Let’s unveil the mystery of franchise financing. How exactly are the majority of franchises financed in Canada?
The options are exactly as follows:
– A special Government programme called the BIL program under which the majority of franchises in Canada are financed
– Owner equity – your own deposit into the deal ( Important to have a good handle on your credit bureau score and personal net worth for all financing discussions)
– Equipment and asset financing
– Working capital cash term loan – typically a 5 year payback
– Vendor financing ( if available – more often than not it is not )
– Revolving line of credit for ongoing operating needs and growth!
With respect to the last point we would emphasize that while it is of course important to structure a proper financing around your franchise purchase many business owners forget to consider how they will finance the business going forward , and more importantly, how growth options will be financed .
It is critical for you to understand that it is very rare that any one option will get you the full financing you need. The reality is that it will be a select combination (and that’s the expertise you require) to fully finance your business with any number of the above options.
We point out in our key point # 2 that you must be prepared. This is where many clients tell us they have failed in the past – they have not prepared a proper business plan and executive summary. The other thing you must consider is that you don’t have a lot of chances to perfect your financing – doing it right once pays off – No one is going to finance you if it becomes apparent many others have looked at your transaction and passed .
We encourage you to prepare a proper business plan, understand what your opening balance sheet will look like, and most importantly, understand the cash flow needs of your business. For example, if you take the time to sit down and do all the numbers ( this is actually easier than you think ) you could find that in month one and 2 and 3 that you might be experiencing negative cash flow . If sales ramp up slowly and you have negative cash flow then clearly you will have problems which could accelerate and dampen the overall success of your business.
Finally, consider using the services of an experience, credible and trusted franchise consultant that can guide you through the financing maze. Having that party properly prepare a business plan, opening cash flow, executive summary, and proper financial projections is worth a small fee you might be charged . Business financing in Canada dried up in 2008 and 2009 – franchise financing is still alive and well though. Many lenders view franchise financing even more positively than other types of businesses and industries – the reality being that there is a greater chance of success for a brand that is proven and known, and has a reliable business model of proven success.
Know your franchise finance options, be prepared in executing on those options, and consider utilizing a franchise consultant to complete your franchise loan and overall funding. That’s a solid common sense plan to achieve franchise financing success.