THE FRANCHISE GUIDE
FRANCHISE FINANCING 101
From securing financing to building a business plan, here’s what you need to know about financing your franchise
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hen investigating franchise opportunities, it’s easy to get caught up in the search. With so many unique concepts and exciting brands to explore, the possibilities can seem endless. But before you delve too far into your research, remember that you need to consider the cost involved. It’s important to know your financial capabilities and limitations before you get started, so that you can set realistic expectations for your franchising future. Here are some of the important financial steps you need to take to make your franchise dreams become reality. Ask yourself: can I afford this? Assessing your means is an important first step when considering investing in a franchise opportunity. In fact, “Can I afford this?” is one of the most important questions to ask before you get started. It’s crucial that you can not only afford the total cost of the franchise, but also that you have a cash buffer. The franchisor can provide you with a summary of the typical costs required to open the franchise—take a good look at these costs and make sure that once you pay the franchise fee, purchase or lease equipment, order initial inventory, and take care of any other start-up costs, you still have money left over. You need to ask yourself whether you have the funds to buy a franchise and support yourself and your family during the critical start-up period. A common reason why new franchisees might fail is because they don’t have enough money going into the franchise. If you put every cent you have into acquiring the franchise, you won’t have the additional funds needed to support yourself during this time. A good cushion would include about three to six months of personal expenses, enough to cover living costs like rent or other home payments, food, and other bills.
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You should have a complete picture of your financial situation at the ready, including a personal net worth statement, personal tax assessments for the most recent two years, and your credit rating, to find a franchise with the right financial fit. Finding the money Once you’ve gathered this information, you need to delve into the details of your assets. Many franchisors and banks have requirements for the ‘unencumbered equity’ a franchisee needs to have. Unencumbered equity is any cash you have that isn’t tied up in any way and doesn’t need to be repaid to anyone else. Most franchisees will finance their franchises with a combination of equity (either personal equity invested by the franchisee or outside equity obtained by selling partial ownership to investors) and debt (loans). The amount of personal funds you’ll be required to contribute is usually based on a percentage of the investment’s total cost. Typically, between 30 and 50 per cent of the investment should be your unencumbered equity. Remember, taking on too much debt can be detrimental, because you need to be able to focus on growing your business and not on making debt payments. Once you sort out how much equity you’ll be supplying and how much debt you’re prepared to take on, you’ll need to approach a bank to help with the financing. A solid business plan is a major asset in securing financing. It helps you determine what financing you need, and how you’ll pay it back. A well-thought-out business plan should cover all the questions your banker might have about your franchise business and how it will operate. Building a business plan A business plan consists of a business model and a financial plan. The business model will outline the qualities of your business—the customers, the industry, the
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