When approaching a bank to obtain funding, there are certain steps a franchisee can take to give themselves the best chance for approval and Darryn McAuliffe, national manager NAB franchise banking, sums these up: demonstrate that due diligence has been undertaken; develop a comprehensive, professionally presented business plan; and provide all requested information in a concise and professional manner.
“Business fundamentals will drive the appetite of any financier. However, the more competent and professional franchisees are in their dealings with a bank the more likely the application is to progress, missing details on applications will cause more challenges for you in obtaining what is required,” he says.
Steve Seddon, franchising development manager, Westpac retail and business banking, says “In my experience the best and most successful candidates are those who have fully researched the opportunity, spoken to other franchisees and the franchisor at length and prepared a comprehensive business plan. They will also seek advice from their business advisor, accountant and solicitor as a part of this process.”
It is also important to determine what funds franchisees can contribute to the business and how much they can afford to borrow. “Franchisees need to establish how they will service any borrowing and what level of risk they are comfortable with. As cash flow fluctuates, they will need to do some forecasts on how they would cope if incoming cash was to decrease by 20 per cent,” McAuliffe advises.
Of course with franchising there is already one step taken towards securing a loan: the majority of the mature franchise systems will have arrangements with banks that try to make the basic process of getting finance to buy a business as easy as possible.
As well as streamlined lending processes, these arrangements allow the franchisee to repay the money within a reasonable period of time while making a profitable living.
According to McAuliffe, it’s a common misconception that banks are not interested in working with emerging systems. “Most are keen to develop a relationship and understanding of both parties. This assists understanding of what it takes to become accredited if that is part of the franchisor’s strategic growth and system development.”
What finance franchisees need to have
Seddon explains the amount of equity required will depend on a number of factors. Most important is whether the franchisor has been accredited. “If they do hold a franchisee finance accreditation, other factors will come into play, such as the term of lease and the term of the franchise agreement. The situation will vary from purchaser to purchaser,” he says.
Joining an accredited franchise system means that franchisees may be able to borrow (subject to credit approval) 40 to 70 per cent of the total set-up cost of a new franchise, or purchase cost of an existing franchise, without necessarily providing their home as collateral for the loan, says McAuliffe.
As an example, to purchase a bakery business from a franchise system accredited by National Australia Bank, which has been approved for a maximum ‘loan to franchise business value’ of 70 per cent where the franchisee needs to borrow as much as possible of the total set-up cost, the loan amount can be calculated as follows:
New Business Set-Up Costs
Equipment, fixtures and fittings $400,000
Franchise fee $50,000
Legals and accounting fees $10,000
Opening advertising levy $5,000
Opening raw materials $20,000
Training fees $5,000
Other fees $10,000
Total investment/set-up cost* $500,000
Calculation of loan required
Cash you are contributing $150,000
Balance of loan required $350,000
percentage of loan to franchise business value 70 per cent
Engendering realistic expectations
But before making any business decisions, it is important prospective franchisees assess their passions and personal commitment, get their finances in order and do some thorough research on suitable franchise systems.
Before making any decision on which franchise to buy, franchisees should ask some questions of themselves, suggests McAuliffe: do they have a passion for the franchise brand and its product or concept? Will they be motivated to work in the business for the next five to 10 years? Do they see profitable growth in the franchise, and if so can more outlets be acquired once established? Does the franchisee share the same vision, values and work ethic as the franchisor, and importantly, will they be happy to comply with the system without wanting to make their own changes?
If the answer to all of these questions is a resounding Ôyes’, then itÕs possible the franchise will suit you, and the franchisee’s relationship with the franchisor will be a positive and mutually beneficial one.
The next step is to do some homework on the franchise system. Questions to consider include: how much is needed to invest to buy and operate? What initial and ongoing training and support will franchisees receive? Does the franchise have the ability to remain competitive and maintain its brand value in a fast moving market?
Once a prospective franchisee is comfortable with the investment required and has decided on a franchise system, the next decision is whether to buy an existing franchise site or to open in a new location, a Greenfield franchise.
“Both have merit, however, an existing site will have a proven track record and cash flow, which will be reflected in the goodwill paid,” explains McAuliffe. “A new site may be cheaper, although not as profitable for a year or more and may need additional capital to support it during the start up period.”
Seddon says franchisees need to look at the franchise system, the industry in which it operates and physical location/territory, taking into consideration that although the franchise business may be well known, the businesses behave differently according to the local environment. The more research conducted prior to the purchase, the better.
And he stresses that accreditation of a franchise system is not a guarantee of success. “Even the biggest and longest established franchise groups will have outlets not trading to expectation. This could be due to a wide range of factors, some of which may be able to be worked on while other factors may be beyond everyone’s control.”
Produce a proper business plan
McAuliffe reminds prospective franchisees that a business plan should not be an afterthought, it should be the first thought. So the best action to take before starting planning is to do your homework and get advice. And the first place any franchisee should look for advice is their franchisor.
A good franchisor will have developed a generic business plan for their franchisees that can be modified to suit their local business requirements and personal goals.
“Some franchisors keep a business plan template mainly focused on acquiring finance. This is a good start if franchisees can get their hands on it and will be exactly what the potential lending institution wants to see,” reveals McAuliffe.
When potential franchisees are setting business goals, make them clear, measurable and time specific, he advises. So it is worth asking: What am I selling? Who will benefit from my service? What will make my business different? What returns do I want? Where do I want to be in six months/one year/10 years?
It is universally acknowledged in business that success does not happen by accident, says McAuliffe.
“If haphazard planning techniques become a bad habit of business owners they may become their greatest downfall. And in the franchising sector, it’s no different. New franchisees can get caught out for not having a proper business plan as they feel safe in the knowledge that they are part of something bigger,” he says.
“In my opinion, this reliance on being part of a franchise system is not a good approach. Franchisees are still business owners in their own right. Their particular franchise could potentially be affected by many differing variables based on location, market, size, start up capital and much more. So every franchisee’s business plan should be different.
“From my experience working with clients, businesses that endure the tests of time are linked by one common factor – a good business plan. Before you serve your first customer, it is essential that this is documented. It is your blue print for success, so refer back to it frequently as it will help keep you on the right track.”
A business plan is more than just a tool to access a business loan. It will help with decision making to achieve the best long term interest for the business.
“A good business plan should act as the seed from which your business will grow, it need not be long and complicated, but it should provide your business with a direction, taking into account all the variables and external factors which affect your business,” suggests McAuliffe.
So what should a detailed and realistic business plan reveal? McAuliffe highlights the following aspects as outlines to be presented in a well-structured business plan: business objectives; the investment and debt required; the location/type of franchise; strengths, weaknesses of the business; opportunities and threats for the business; revenue and profit expectations; start-up working capital, in addition to any capital required to support the business until its cash flow is positive.
“The business plan is your blue print for success, so if youÕre not confident in doing this alone, it’s recommended you seek professional advice from a reputable firm with experience in franchising,” he concludes.