Buying A Franchise: Financial Matters
making the
See your specialist franchise banker as an ally
DREAM
COME TRUE
As the market improves, Daniel
Cloete from Westpac looks at
how to fund a franchise business
⇒
Over the past two-and-a-half years, economic conditions and
confidence influenced the whole business lending market. In recent
months, however, we have seen lending starting to increase again as
business people position themselves to cash in on a potential lift in the
economic environment. In addition, the injection of capital supporting
the Christchurch rebuild may further support a return to more positive
economic conditions.
The result has been that existing profitable businesses are starting to
come on the market and many franchisors are looking to establish new
outlets again. The failure rate among small businesses can be very high,
whereas the 2010 Survey of Franchising in New Zealand indicated a lower
failure rate in reputable franchise systems. In addition, franchising has
growing credibility with large corporations as a business format. This
means that we have a growing industry with reduced risk, which makes
it attractive to financial institutions to finance. As a result, if you want
to go into business, it could be significantly easier and cheaper to buy a
reputable franchise rather than a normal small business. So how should
you go about it?
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Obtaining bank finance might seem to be a big issue, especially for
first-time buyers of small businesses. In fact, it is essentially an easy
and straightforward process, using the same information you need
yourself to assess the business anyway. One thing that the potential
franchisee should remember is that he or she is the bank’s client – not the
franchisor! It is therefore in the bank’s interest that its clients join a stable,
profitable franchise system without paying too much for the business.
You should therefore consult a specialist franchise banker and see them
as an ally that has your interests at heart. A good specialist already knows
most of the franchises available and can quickly see if franchisors’ claims
(like income or expenses) are realistic.
This does not mean you should not do a proper assessment yourself. Your
bank is going to expect you to know intimately the business that you are
planning to buy and its financial position. By doing your own research
(see page 58) and using experts like franchise accountants and lawyers,
you can save yourself time and money and identify the right business
opportunity for you.
What will your banker require from you?
One of the first questions is: what information does a bank require to
process a prospective franchisee’s application quickly and effectively?
This is sometimes a source of great anxiety but it need not be a problem at
all – most of the information will become available anyway in the process
of assessing the business.
Cashflow Projection. A bank typically needs a 12-month cashflow
projection for the proposed business, including a list of the assumptions
used to determine the figures. If the business is an existing one, it will
also want to see the historic financial accounts for an existing business.
In the case of a new franchise, the franchisor may provide cashflow
projections based on expectations and on what other similar stores in
the system are doing. These are not guarantees, of course, but in a solid
system with a good track record can give a good indication of possible
performance. If done properly (with the assistance of your accountant if
All Franchise New Zealand articles are copyright ©Franchise NZ Marketing Limited and no part may be reproduced without the specific written permission of the publisher.
Franchise New Zealand Volume 20 Issue 02 Winter 2011
Find more info at www.franchise.co.nz - Franchise New Zealand online
necessary). cashflow projections will tell you about the real value of the
business as well as how much bank finance you need to obtain.
Information. The bank will want to see a breakdown of the purchase
price of the franchise and factors like details of the franchise location and
demographics of the area if applicable. It will also look at the buyer’s own
financial position.
Business Plan. Producing a business plan is a very worthwhile exercise
and need not be elaborate in most cases. It will help you to understand
the business you want to purchase better, to focus your thinking, and to
convince the franchisor and financier of your abilities. It should include
aspects like an explanation of how you plan to run the business; who will
be operating the business (yourself, manager, family members) and their
abilities; working capital required; information on the market environment
and background on the specific franchise under consideration.
Your Finance Request. Getting the finance you need is not usually a
question of just asking for a loan. You want to borrow the right amount of
money only when you need it and on the best possible terms. Different
needs can be financed in different ways: for example, short-term working
capital via overdraft, medium-term business finance via a term loan;
funding equipment or vehicles via equipment finance (usually preferable
to leasing as you end up owning the item, enjoy the same tax benefits and
can use the item itself as security). The bank would look at the term of
your franchise agreement; the debt servicing capabilities of the business
and the particular needs of the industry in determining the best mix for
your individual needs.
How much will the bank be prepared to lend you?
The question is not, “How much can you borrow?” but rather, “How
much can the business afford to repay while still allowing the owner a
decent living?” You and your bank would not want you to be unsuccessful
at running the business because of being over-geared. Remember to
consider any tax implications in making the calculations (this is another
area where the advice of an accountant is vital).
The bank will also look at how much money you are prepared to
put in yourself; the security you can offer; your financial record of
accomplishment and business acumen; and other factors if applicable.
In certain exceptional cases with proven systems where the equipment or
stock lends itself to that approach, they may also lend against the value
of the business itself. This can reduce the total security required but,
because of the many variables involved, it will be judged on a case-bycase basis.
Points To Remember
Before committing yourself to any purchase, you should determine how
much finance you require and involve your banker in the decision-making
process on the required amounts, terms, timing and mix of financial
solutions that will best meet your needs. Remember:
• Your bank values your custom and wants to make it as easy as possible
to obtain finance for the right business.
• Familiarise yourself with the processes and information required to
obtain finance. This will help you to ask the right questions when buying a
business (see page 6), save a lot of time and effort and put you in a much
stronger negotiating position.
• The information that you need to assess the viability of a business
opportunity is the same that the bank needs to process a finance
application. Get the information, do it once and do it right. Use expert
advice where necessary.
• In obtaining finance, you are
entering into a long-term financial
relationship with your franchise
banker built on trust. This makes it
important for the bank to look after
your interests.
• Look at the services and added
value that your bank can offer over
the longer term after obtaining
finance. You are in this together
for the long haul and informed
relationship banking can make a
huge difference to the eventual
success of your business.
About the Author
Daniel Cloete is the National
Franchising Manager for Westpac.
You can contact Daniel or your local
franchise manager in the Westpac
Franchise Team on 0800 177 007
or email: [email protected]
The information contained in this
article is intended as a guide only
and is not intended as an exhaustive
list of matters to be considered.
Persons entering into franchise
agreements should seek their own
professional legal, accounting and
other advice.
All Franchise New Zealand articles are copyright ©Franchise NZ Marketing Limited and no part may be reproduced without the specific written permission of the publisher.
Find more info at franchise.co.nz – Search: Westpac
Find more info at www.franchise.co.nz - Franchise New Zealand online
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