A robust business plan is essential to secure franchise finance
Unless you’ve just won the lottery, it’s likely you’ll need some sort of funding to buy your franchise business. Taking out a loan can be daunting, as it means incurring debt before you start. But considering the funds as an essential investment in your future is a much more positive approach.
However, you do need to do your due diligence. There is risk involved in setting up any new business and the financial institutions will look at you as an individual and your chosen franchise to assess if it’s a good investment before they agree any funding.
Paying back your loan
Borrowing will be set over the same time period as your franchise agreement, typically five years. This is to ensure that should your agreement not be extended, a bank will have had full repayment of the initial investment. It’s also important to remember that should you require funding for expansion, the remaining time on your agreement will be taken into consideration.
If you’re buying a resale franchise, you can borrow against the strength of the existing business. For new franchises, rates of interest can vary enormously, depending on a myriad of factors, including the individual, the franchise opportunity and even the franchisor. So be prepared for questions about your background, career history and all your personal assets and liabilities.
Key to success
Given the current political climate and uncertainty around Brexit, banks, franchisees and franchisors alike are being even more cautious than normal. Therefore, to secure funding and gain the most preferential rate, a robust business plan is essential.
In some cases, the franchisor will assist in its completion, which can be seen as a conflict of interest, as the franchisor’s aim is to sell the franchise, which may skew the numbers. Most franchisors choose to remove themselves from the equation and empower a financial professional to complete the business plan in conjunction with the new franchisee.
Even before this stage, working with an independent franchise expert can help. At d&t, we offer an initial health check. Much like when seeking legal advice for a contract, d&t can look over the franchise proposition, plus any financial templates, and work the numbers so you don’t have to. The purpose of this report is to arm you with the tools needed to make a decision on whether to proceed with the business. At the very least, it will point you in the direction of what questions to ask a franchisor.
All systems go
If it’s all systems go, the business plan can be set in motion which, as well as providing you with a complete set of profit and loss forecasts for three years, will form the backbone of your funding application.
An independent broker can focus on connecting franchisees to financial institutions, with the goal of achieving the best rates possible. In this way, funding can usually be secured in just a few weeks.
Failing that, anyone seen my lottery ticket?
James Thomas is commercial manager at d&t, an award-winning chartered accountancy and business advisory specialist