Brand recognition, longevity, financial strength, reputation and proven track record supporting franchisees, can have a significant impact on the value of a franchise business and on the financing options available to the business owners.

NAB’s head of franchise banking Despina Kathestides says brand strength, driven by the above factors, is one of the main considerations NAB looks for when it comes to making lending decisions on franchise applications, due to the effect that brand has on business value. 

Franchise businesses generally sell for a multiple of ‘earnings before interest, taxes, depreciation and amortization (EBITDA) in the market’, the stronger the brand, and the greater the demand, the higher the multiple.

“Essentially, we’re lending based on the financial strength of the individual customer, their collateral and capacity to service, but we are also lending against the strength of the brand,” Despina says.

The extent to which we lend against the business multiple/business value also varies significantly based on brand strength and our relationship with the franchisor.

New brands looking to establish “greenfield” sites – in areas which have not previously had that franchise before – may find it more challenging. 

“We’ll treat those franchisees like any other small business owner. Normally we want to see a small business have a proven operating performance for one to two years before we can provide funding. The same applies for a brand that’s new, and not established in the market. Franchisor support is essential at this early life cycle stage of the franchise.”

Accreditation and engagement

One way that franchisors can smooth the path for prospective franchisees to obtain finance is to seek accreditation with a lender. Most banks will have an accreditation program for franchise systems which, among other criteria, assesses the strength and health of the brand.

Lenders are selective about which franchises they work with. There are about around 1200 franchise systems operating in Australia, however approximately 10 per cent of these are likely to be accredited with any bank. As an example, there are 27 brands on NAB’s accreditation list currently – although the bank is actively expanding its reach. 

Despina says NAB’s accreditation process looks at factors such as the longevity of the brand, the number of sites in the franchise system, brand recognition, franchisee and franchisor financial performance and the franchise brand’s competitive advantage in the market.

“We also look at environmental, social and governance (ESG) performance, ensuring that controls are in place for the payment of wages by franchisees, controls around food, health and safety, and brand standards and brand reputation overall.” 

Newer brands may need to do more to prove themselves as they don’t have a long history to draw on to demonstrate success. While rapid growth of a franchise network may be a positive, Despina says lenders are more interested in seeing sustainable, consistent growth with controls and support in place to ensure franchisees can be successful. 

The level of support that a franchisor offers to its franchisees is more important than ever in today’s challenging economic environment. 

“We look at what systems and processes a franchisor has in place, the quality of their training programs and induction. Other questions we ask include ‘How often do you bring franchisees together to share best practices? What do you do in terms of understanding the financial performance of franchisees and whether that’s sustainable?’

“The best brands recognise that everybody needs to be financially successful in order for the brand to be successful over time,”  Despina says. 

Brand research  

There are several steps that prospective franchise business owners can take to assess the value of a franchise brand before buying in, she says. 

Looking online to identify any complaints, issues or media coverage can reveal how the brand is perceived in the market. Whether the franchisor is involved in any legal disputes that could affect the brand’s value should be shown in their disclosure document. 

Checking how many franchises have recently closed or sold and what the reasoning was for these closures or sales – while not necessarily indicating a problem – may offer insights into the way the franchise system operates.

Franchisees should also be realistic about their own business plan and break-even point as they will need to demonstrate to a lender that the business will make enough money to repay any debt within the required term, after covering running costs.

Ultimately, selecting a strong and well-supported franchise brand can help franchisees to secure finance, and build a successful business over the long term. The franchisor plays a key part in this process and partnering with a bank can make all the difference.

To find more information, speak to a NAB banker or visit nab.com.au/franchising

Important information

The information contained in this article is believed to be reliable as at October 2024 and is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, property, financial and taxation advice before acting on any information in this article. © 2024 National Australia Bank Limited ABN 12 004 044 937 AFSL and Australian Credit Licence 230686