It’s a road you want to go down successfully. We’re talking about your decision on buying a franchise in Canada, financing the franchise cost and being successful in the franchise store or business you have chosen.
Clients always ask us if it’s ‘ risky ‘ to buy a franchise. Our answer is somewhat facetious, in that if a franchise fails, we prefer to have someone to blame – that’s you, the franchisor, or your franchise lender. It’s rarely the lender, leaving you and the franchisor.
The reality is quite frankly the same as if you were acquiring any business, namely, Do your homework! And invest some time in solid due diligence. Make a good decision around who you are going to do business with.
After selecting a franchise opportunity the challenge of financing the business becomes even more bewildering to some of our clients. Let’s share some solid tips, info and suggestions around the successful financing of your franchise cost.
We often focus solely around your own financing challenge when buying a franchise; we should add that its just as important to spend some time on understanding the general financing situation around the partnership you are about to enter into with your franchisor. Disclosure documents these days are fairly heavily weighted towards you as the franchisee understanding that you are entering into business with, so we encourage all clients to take a strong look at your franchisors profitability, its financial management, and any items of public record that might hint or portend of future problems.
Unfortunately many franchisees we talk to about franchise cost and how we will finance the franchise are under the misconception that there is 100% financing available for your new business. In Canada that is pretty well never the case, and you need to make a strong assessment of the maximum amount you can contribute to the venture from a personal equity basis. If you borrow too much and put too little in the financial folks call that being ‘ over leveraged’- therefore any little bumps in the economy or your ability to generate sales becomes a huge problem if you aren’t properly capitalized.
And we already know you next question, which is ‘ how much do I have to put in ‘. We would prefer to give you a clear final answer on that one, such as xx %, but the reality is that your own investment is tied to a couple factors… the size of the financing you require, how you will finance it, and whether initial ratio analysis will show that you meet all qualifications.
A ratio is just a ‘ relationship’ of numbers. The two key ratios that you need to focus on in franchise financing are debt to equity, and working capital. Typically you want to have only two times more debt than your personal investment in the business, and from a working capital point of view you want to ensure you have liquid assets to cover at a minimum short term payables.
Do franchisors offer loan assistance – the answer is yes… and no. By that we mean simply that many franchisors have developed relationships with Canadian business financing advisors who assist franchisees in finalizing all aspects of the franchise cost financing – including business plan preparation, negotiations, sourcing debt, etc. You should rarely, if ever, expect the franchisor to supply direct loan financing assistance – they are selling franchises, not building a financial empire.
In Canada typical methods of financing a franchise are a BIL loan, a working capital term loan, and equpment leasing and financing.