Franchising requires planning, research and a fixed eye on future gains

3 Nov 2014

Buying a franchise can be quite expensive, especially if you are considering linking up with a franchisor that represents an internationally respected brand, which is already a household name. As a result, very few entrepreneurs can afford to finance the franchise completely from their own resources.

Franchising requires planning, research and a fixed eye on future gains

Opening a franchise store is a major event for an entrepreneur. It requires a thorough understanding of what you are required to do, and what the duties of the franchisor are. We advise our potential clients to take all the necessary steps to ensure that their lifetime investment remains a positive event in their lives. This often requires having an attorney or financial advisor to carefully evaluate the implications of a deal.

Because of the importance of this decision, the bank often allocates a relationship manager who has the expertise to advice franchisees on products and services available and how best they can be utilised.

A franchisor must approve a prospective franchisee before a bank is approached for financial backing. The bank will require the following personal information from the franchisee:

Copy of the franchisee's identity document and confirmation of marital status
Personal balance sheet of the franchisee
Statutory registration documents of the company
Proof of the origin of the unencumbered deposit
Background of the franchisee (similar to a CV)

In respect of borrowings for the franchise business, it is important to provide the bank with a breakdown of the funding requirements. One's application for credit facilities must be supported by the following information:

Comprehensive business plan and a copy of the franchise agreement of sale
Copy of the lease agreement
Signed financial statements and a 12-month cash flow projection - if these are older than 6 months, up to date management accounts will be required
Six months bank statements of business trading account

When borrowing money to finance a franchise it is important to match the duration of the funding to the lifespan of the asset/s. It is common for franchisees to be offered a combination of products that match specific needs. These can include:

Property Finance: This caters for long-term, flexible finance for the purchase, construction and refurbishment of commercial or industrial property and buildings
Medium-term loans: These are most suited to capital expenses involved in franchising and are usually payable in monthly instalments that typically vary from two to seven years
Business Current Account: This indispensable product helps to track money flowing into and out of the business effectively. In addition, an agreed overdraft facility can allow unexpected expenses to be met as they occur.
Vehicle and asset finance (VAF): This involves specialists from the bank's VAF finance department helping to assess what funding is needed for vehicles and operational equipment required by the franchise. In addition, finance can be arranged to assist with setting up computer networks or even mainframe installations

Like any business, a new franchise store needs time to become established. Depending on the area, the number of potential customers and the type of franchise operation, this process can take up to two years. Getting going can therefore demand sacrifices that could include working without a salary when this is required, and making sure that money is retained to finance future growth.