First Financial Coach

Article by Stan Prokop

Clients are always asking what extra steps or information they need to know to complete a successful acquisition a new or existing franchise. Buying a franchise, it goes to says, is clearly one of the largest decisions any entrepreneur might take. Of coruse there are a couple of different versions of the opportunity, as follows – 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 alreadyAre there any special tips and critical pieces of information you need to know that will get you a leg up on a ‘ leg up ‘ in the area of franchise finance. Let’s share and discuss three critical points.1. Franchise Finance is a very specialized type of financing – financing options are available but not unlimited – you need to know what they are2. 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!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 in general has always been 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.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- 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 on an ongoing basis, 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 combo (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. 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 options, be prepared in executing on those options, and consider italicizing a franchise consultant to complete your franchise loan and overall funding. That’s a solid plan!

Article by Stan Prokop

Franchise Financing in Canada continues to be both a great opportunity as well as a challenge in obtaining the right financing, the right amount of funds, and most importantly the rates, terms and structures that will maximize your opportunity as a franchise entrepreneur. Clearly the concept of owning ones business in an already success and proven business model is appealing to many Canadian business people, men and women alike.

When clients come to us for franchising assistance they are focused on a number of key different areas relating to the financing and acquisition of their franchise. Many franchisees do not have a financial background – their experience is often based on their career and industry experience in the field they are looking to be a successful franchisee in. Therefore we encourage all franchisees to seek the advice of a credible, experienced and trusted financing advisor who can guide them through the franchise financing process.

So what are those prospective franchisees looking for? They are looking for the right amount of funds that will finance their venture to the extent that it can meet their profit expectations based on their own personal financial contribution, as well as of course the borrowed funds.

The century old phrase ‘character / capacity/capital ‘applies to all borrowing, and certainly franchise financing is no exception. The financier wants capable trustworthy borrowers who are prepared to make some sort of contribution of their own from a financial perspective. Credit quality of the borrower is one of the many factors in franchise financing. It is certainly not impossible to get financing if you have either a low net worth or a tarnished credit score, but it certainly becomes more challenging.

As a franchisee you want fast turnaround in the financing component of your new business. Our experience is that if the owner is properly prepared, with a decent business plan and all the necessary miscellaneous documents, that a franchise financing can generally be completed within 2-4 weeks. Miscellaneous documents that are part of the entire financing process include your personal financial information ( net worth, etc), as well as items such as your executed franchise agreement, proof of deposit, your premises lease, etc. Some clients come to us for a 5-7 year term financing for their new business, but they only have a 3 year premises lease. Your premises lease must match the term of your loan, that’s just common sense. If there is no premises there is no business, and therefore there is no loan payment. Again, just common sense.

Franchises in Canada are financed in several different ways, the major method being a specialize loan program called the CSBF program. Additional financing is done via term loans for working capital, equipment financing for hard assets. And generally a small operating line of credit at the opening of the business.

In the current more challenging financial and economic environment we believe the best franchise financing is achieved by combining several of the above financing options in a structure that makes sense for the business based on cash flow repayment ability and the collateral involved. Many soft costs such as franchise fees cannot really be financed, so they are often taken care of with the franchisees own investment portion of the total venture.

As a general rule it is somewhat easier to finance the purchase of an existing franchise, as the assets, cash flow, and overall value of the business are more established.

So let’s recap some key bottom lines on franchise financing -

- Start your financing discussions and preparation early on in your business venture process

- Determine what mix of financing you need, which will be combined with your own investment

- Ensure you have a proper presentation and business plan – if you don’t have one get one done by an expert

- If you don’t have a financial background seek the advice of an experienced franchise financing advisor who can work with yourself and the franchisor to get the best total overall franchise financing solution for your proposed new business, relative to rate, term and structure and any collateral required.

That is a successful franchise strategy.