Investing in a franchise

Considering investing in a franchise? HSBC offers some expert advice

Most franchises are designed for people with little or no experience in a specific industry, so starting a franchise allows you to try something new.

Franchising is considered a safer option than going into business on your own. A franchisee should have a tried and tested format to follow, training and support from their franchisor, and a network of fellow franchisees to speak to - so although franchisees own and operate their own business, they are not doing it alone.

Flying start

A good franchisor will encourage and help its franchisees with business planning, both at the outset and on an ongoing basis, helping them to get off to a flying start and continue to develop.

Many small business owners are too busy tolook at what is happening in the marketplace, what competitors are up to and how customers’ needs might be changing, but a good franchisor will consistently research the market, helping its network of franchisees to keep ahead of the game.

All this support means banks are much happier to lend to a start-up franchisee.

Before you talk to a bank about borrowing money to start your franchise, you need to establish how much funding you will require. You should do your homework and fully research what you will be getting for your money, both at the outset and once your business is established.

There are a number of costs that need to be taken into account. You may need to think about professional charges related to any property transaction, such as lawyer, architect and surveyor’s fees, as well as insurance. If employing staff, there may be recruitment and uniform costs. There will also be marketing costs involved with an official launch of the business. In addition, working capital may be required - what you need to live on prior to the business generating cash flow and profits.

You will need to prepare a business plan and cash flow forecast for the first two years of the business, ensuring you understand the figures, what they are based on and how much you will have to turn over in order to break even.

Complete a full list of your personal income and expenditure, including mortgage, household bills and partner’s earnings. Consider what security you can give to back up your loan, such as equity in your home.

Financial implications

It is important to consider the financial implications carefully before buying a franchise. You are entering into a long-term commitment and need to get the finance right at the outset. Don’t do it on a shoestring, but don’t borrow more than you can afford to repay.

A bank will carry out a full review of your background and reliability; your training, qualifications and track record; financial resources; and suitability to run the business.

Apart from the actual amount, a bank will also look at thepurpose for which the money is going to be used.For an established franchise, most banks will lend up to 70 per cent of the start-up costs. For new franchises, the figure is around 50 per cent.

When it comes to repayment, a lot will depend on business performance. A well thought out and structured business plan and cash flow forecast will demonstrate your business can afford to repay any lending.

A bank will also assess the risk of lending and decide whether security is required. When a bank sets an interest rate, it takes into account a number of factors, including your stake in the business, security deposited, business sector and its evaluation of the risk involved. MM