How to raise finance to buy a franchise
Identifying and Raising Finance for your Franchise
Raising finance for the purchase of a franchise may seem daunting. It really doesn’t need to be. I have broken down some of the essentials to help you in your search for funding.
• Step one – Identify the opportunity.You need to start by ‘whittling down’ the 901 UK based franchise concepts until you arrive on what you believe to be the franchise opportunity for you. Before you even think about the finances, conduct your own in depth due – diligence into the franchise opportunity. Take time to speak with a range of existing franchisees (franchisees achieving a range of turnover, not just top performers, if possible), they will be able to give you a ‘warts and all’ perspective of the franchise. Bear in mind it is not their job to sell you a franchise license! Qualify the franchisor, do their objectives and drive meet your own? This is a very important relationship and if you have serious reservations regarding compatibility it may not be the opportunity for you! If you have conducted sufficient research first hand and all is looking rosy, it’s time to progress to step two!
See the franchise opportunities available on Daltons Business>>
• Step two – Prepare a comprehensive business plan. Anyone can write a business plan.
Not everyone can write a good business plan. Even fewer people can write a business plan to a professional standard, in the format that lenders love to see. A business plan can be written with a number of focus points. In this instance, you are preparing one to form the vital piece of your application for finance. Keep this focus throughout and do not deviate too much, once you start losing the focus, the usefulness of the document comes into question.
• Step three – Construct your comprehensive financial projections. I’m not talking about a one or two-year profit statement, you need a comprehensive set of detailed financial projections covering a minimum of three years. You should have a projected profit and loss account, cash flow forecast and projected end of year balance sheets. These figures cannot just be based purely on personal predictions and artificial assumptions, you need to be as ‘scientific’ as possible. Your franchisor should be able to steer you here, there will of course be certain territory specifics due to factors such as varying levels of affluence, however, broadly speaking the projections should be relatively similar to those of other trading franchisees within the same network.
• Step four – Contribution calculation. Once you have conducted your forecasting exercise, you will know what the predicted total start-up costs are, taking into account working capital (crucial you have an adequate amount while the sales volume grows in the often-challenging early months). Lenders will typically have a ‘lending stance’ towards a given franchise, which normally varies from 50 to 70%. This means the applicant(s) for finance will have to contribute between 30 and 50% of the total start-up costs. If your financial position does not allow for this, it may be time to reconsider the opportunity or alternative ways to raise capital i.e. a non-repayable gift from friends/family.
• Step five – Assess your available provider options. Gone are the days where you only have one or two lenders available to you at the outset of your business journey, the landscapes of accessibility and availability have altered significantly over the years, which is great news for the franchise industry!
A variety of options are available to you, these include:
High Street Banks – Traditional lending, flexible business loans and overdrafts
Challenger Banks – Unsecured fixed rate business loans
Asset Finance Providers – Both Hire Purchase and Lease facilities
Government start up loans scheme – £500 to £25,000 government-backed loans
Alternative Lenders – Including loans with credit card percentage repayments
One or a number of these options may be appropriate for your given circumstances. It’s important to take the time to consider the most attractive options available to you.
• Step six – Why the ‘Franchise Department’ is so important. A franchise unit start up is significantly different to a complete new start business. The proven model in addition to the training, support and development provided by the franchisor significantly ‘de-risks’ the proposition. Having an understanding of this is paramount. Certain lenders do not have this awareness. What this means is a franchise start up is treated in the exact same way as a new start business, and this can be reflected in the cost of borrowing, and may prove pivotal in making that ‘YES/NO’ lending decision. I strongly recommend that where possible, applicants should introduce their funding application to the franchise department of the chosen lender.
• Lenders love franchising. Why do lenders love franchising? In business, a proven business concept gives lenders confidence that the borrowed capital will be repaid within the agreed terms. Lending decisions are largely about risk, anything you can do to reduce the risk to a lender will improve the likelihood of a successful application for finance.
• Next steps… If you follow the guidance set out above, you stand a good chance of success. However, if you need a little help, or want to seek additional advice, talk to the professionals! There are numerous franchise consultants who have extensive industry knowledge and experience that would be delighted to assist you.
Rob Orme QFP, Marketing Manager of Franchise Finance, is the author of this article. He is the youngest recipient of the bfa’s ‘Qualified Franchise Professional’ award. Franchise Finance provide a business planning and arranging finance service to franchisees and franchisors. They also have their own Business Training Academy, which delivers business and financial training to franchisees, franchisors and support staff. To find out more, email firstname.lastname@example.org, call 01844 355575 or visit www.franchisefinance.co.uk