How to Finance Your Franchise Investment

You have made the decision to purchase a new or existing franchise then quickly realize that basic question – How do you finance your franchise investment.

Money or funding as quickly becomes a top priority and your ability to successfully finance your investment in your new business will ultimately play a large part in your success or failure in your new role as a Canadian entrepreneur.

For non- financial people, those not trained or comfortable in finance that challenge suddenly looms large – at the same time you have read in the papers that business financing continues to be difficult as Canada comes out of the global financial meltdown of 2008-2009.

So how can you be successful then and finance your franchise investment in a manner that allows you to take advantage of your independent business opportunity. The reality is as follows – franchise financing is available in Canada today – it is some what of a custom made financing, and the three largest assets you can bring to the table to succeed are the ability to seek out a trusted and experienced franchise financing advisor, as well as your own business and credit experience, coupled with a relatively reasonable down payment.

The true secret to your overall franchise financing success is the ability to put together a solid, slick proposal that at a high level demonstrates your ability to run the business, the potential financial success of the business, and then presenting that information to sources of franchise financing in Canada.

A key ingredient in all of your planning should be a carefully tailored business plan that highlights the basics we have discussed – this would include a summary of your business experience (and why you will make the business successful), some key financial such as, at least, your sales and profit projections for one to perhaps 3 years. And equally as important in this data is carefull documentation of your costs and expenses.

So let’s assume you have that completed – you now have to present it to a franchise financing and funding source, and ensure you have properly describe the amount of equity of personal funds you will put into the business, as well as the debt component, or total borrowed funds. The magic relationship of the right amount of debt and equity in your business will leave you, as the financial textbooks describe, as ‘properly leveraged’. By that we mean simply that it is probably very wrong to purchase your business with all cash, and equally or moreso as wrong to assume you can or will borrow all the funds needed. Either of those strategies is not recommended!

How are franchises funded in Canada asking our clients? In our experience they are financed mostly by the government sponsored Small Business Loan. In addition that is supplemented by equipment financing where applicable, as well as your own personal investment in the business. Two other sources of financing sometimes come into play; they are a vendor take back on part of the financing, either by the franchisor or the franchisee you might be buying an existing franchise from. Also available in certain cases is the ability to negotiate a cash working capital term loan from the one institution we are aware of that provides that type of financing.

The proper mix of all of the above components of franchise financing will should in fact allow you to successful complete your acquisition.

How to Finance a Franchise – Your Options and Risk

Entrepreneurs who wish to purchase a new or existing franchise are always asking us ‘What are my Financing Options?”. The ability to choose the right financing option (in reality it is the right mix of financing options) is one of the most important aspects of your entry into the purchase and running of a successful franchise in Canada.

It is of course very rare that a franchise can be purchased for all cash, as the amounts involved can be very significant. And in fact, as we will demonstrate, in many cases that would actually be the wrong thing to do. Even the largest and most successful corporations in the world take on debt, there is good debt and bad debt of course (as consumers we now that also. By utilizing the right mix of debt and your own equity you can properly ‘leverage’ the business for greater rewards and returns.

We will use a quick and somewhat blatant and unrealistic example just to illustrate our point. Let’s say that you wish to purchase a franchise for 250,000.00, which is certainly not an uncommon amount. You have the option of paying cash for it (lets pretend!), or you can put 10,000.00$ down and borrow the rest. At the end of one year your franchise nets 20,000.00 in net income, let’s assume. If you had only put in 10,000.00$ of your own money you have generated a 200% return on equity. Even Warren Buffet would be jealous of you. However, had you put in 250,000.00$ of our own money you can clearly see you have many years to go before you get a positive return on your significant initial investment.

So whats our bottom line – it’s simply that debt and the right amount of leverage can be a good thing, and it’s an excellent way to measure the potential returns in any business, including your investment into a Canadian franchise.

Let’s return to our core topic, financing your franchise. The reality is that are several options in Canada to finance your purchase. Those options can relate to either a new or existing franchise – both are quite financeable. One of the main reasons you might wish to consider purchasing an existing franchise is that in some cases the track record and the assets in the business might present an easier case for financeability.

Franchise financing in Canada is absolutely a specialized type of financing. When we sit down with clients to evaluate their options d and focus on the quickest and best way to achieve franchise financing success we can summarize your financing options in the following manner –

-Government Small Business Loan – (By far the most common and popular)

-Your own personal equity or down payment (typically from 10-50%)

– Equipment and asset financing

– Working Capital Term Loan

– Operating facility for ongoing requirements

– VTB – (Vendor take back) – in some cases the franchisor or the seller of the current franchise will waive full payment and agree on a final pre agreed upon payment to be made at some point in the future

Whether you consider yourself financially astute, or if you are concerned and worried that you don’t know enough about financing in general, it is strong recommended you align yourself with a trusted, credible and experienced advisor in franchise financing. Understanding your options, picking your options, and executing on those options within your timelines is the key to franchise financing success.

Timeline: Your Personal Success Tracker

You might hear the word success and think of: Fame, Glory, Power, and Control. These are great attributes, however they drape quietly over what we really long for, which is success. Fame, Glory, and Power etc. are all individual characteristics that one may desire while another may not. Success is a Universal desire, it has no boundaries, no requirements, and no limitations, though sometimes it can feel like there are lifelong membership fees. This feeling alone may cause many people to give up on their dreams, and their finances.

Well don’t give up just yet, controlling your living is a lot easier than you think. Two important ways to stay on top of your situation are to 1. Recognize and Repair early and 2. Break down your financial structure, and focus on one section at a time. The reason for doing this is so you’re in control, after all the only one who knows your success rate is you. My acronym for success is Something Under Certain Circumstances Enticing Self Satisfaction. That’s all it is, self satisfaction, i also refer to this as financial freedom. One way to show yourself where you stand on financial freedom is by using the Timeline.

Imagine your whole life as if it were dots on a line graph, lets say 10 years back. One line is for your checking account, one for savings, one for expenses, one for your IRA/401K, and then one for anything else you do such as a diet. You will come up with many new lines as time goes on and remember that these are just the fundamentals. Review the following section and try to vision your lines and see where you stand on self satisfaction.

Identify, Assess, Resolve

As you read these, try to apply them to your situation.

Line 1- Checking: From 10 years ago to now this line should be constantly changing, yet always above the expenses on the graph. Line 2- Expenses: This will also be a rapid wave yet the object is to keep it under the checking and savings. Line 3- Savings: Should always be increasing, yet you get to choose the rate Line 4- IRA/401K: Steady consistent increase, towards the bottom of your Timeline in the early years yet working its way to the top. Once you start using this tool monthly, or even weekly, you can identify problems fast while fixing them is easy.

These are just the fundamentals, there are truly so many ways you can use this tool to help you through life. A great way is to demonstrate this to your child. Being financially secure in a way they understand can open up unlimited doors later on in life.

I hope this helps you and your family and any friends that would benefit from the reading.