Canadian entrepreneurs can be forgiven for feeling overwhelmed when it comes to buying a franchise and financing a franchise once they have made that very significant decision to own their own business within the franchise model.
Being armed with critical information about financing a franchise is a key part of your overall success when you purchase a business within the franchise model.
The excitement of owning your own business and finding a solid opportunity is often very quickly overshadowed by the entrepreneur's concerns that financing prospects might be limited. When we talk to clients about their desire to purchase and finance a franchise we try and make it clear that franchise financing in Canada is a specialized part of the overall business financing landscape. Given the specialization we strongly recommend to clients that they seek the services of a trusted, experienced and credible franchise finance expert to assist them in their overall acquisition strategy.
Start-up Capital in franchise financing at the same time is no different than if you were starting a business in any other industry. That original capital comes from you as owner and from a lender or lenders as debt, or loans, etc. Many potential franchisees in Canada cannot get off the ground because the franchisee is unable to properly document their business track record, as well as demonstrate some sort of credible personal financial history, such as decent credit history. Most franchisors themselves, as well as your lenders will want to determine if you as a small business owner have handled your personal financial affairs in a credible manner. We, therefore, work with clients to present a net worth statement and credit bureau documentation which allows us to at least get out of the gate in a positive manner.
So you have focused on a specific franchise, you have done your due diligence, and we are now at the point of implementing a finance strategy. If there are any secrets we share with clients around franchise financing it’s simply that it is rare, in the current environment, for one particular method of financing to access all the capital you need. Therefore a carefully crafted business plan that outlines your own investment and your proposed sources of capital is critical in a franchise finance strategy.
We can’t overemphasize the requirement for a business plan. It doesn’t have to be 100 pages long with pictures, but it sure better include info on yourself and your experience, the proposed business, how you will finance it, and some reasonably credible projections around sales, expenses, and projected profits. Typically we find that a 3 year projection is satisfactory. One of the mistakes many owners make is that they focus on getting the business, and not fully getting into how the business will finance itself on a day to day business, allowing for future growth. So focus on both, that’s important.
The ability to present your business plan and finance proposal in a confident and positive manner is key if you are not comfortable doing that seek the help of an experienced franchise financing business advisor who can work with you in every aspect of the plan and its presentation.
One of the big mistakes we see our clients make is that they feel they can rely on the franchisor, your new business partner so to speak, to either provide or assist in the financing of your new business franchise. The reality is that they are in the business of selling franchises, not financing them, so you must stay much focused on obtaining external financing.
So let's get on to another ‘key secret' we are sharing about franchise financing in Canada – which is simply, how are they in fact financed. If the terms ‘BIL‘, CSBF Loan, and SBL mean nothing to you, that is not a surprise to us. All of these terms are acronyms for the government’s small business financing program, under which the majority of franchises are financed in Canada. In our own experience it is necessary to complement that strategy with potentially several others, which include a working capital term loan, equipment financing where applicable, and, in the case of you purchasing an existing franchise, a vendor take back from the current owner.
It is true that the majority of businesses in Canada, franchise or other are financed by borrowed funds, i.e. ‘Debt‘. But you must make a personal investment in the business also. This tends to be one of the biggest challenges clients come to us with, which is simply the question – ‘How little can I put down to acquire this business‘. The answer to that is a couple of things – first, it actually doesn’t make sense to finance the entire business with your own funds, so borrowing for leverage is good because it essentially increases your own return on your investment. The other point is that the franchisor has track record and experience in knowing what a typical franchisee investment of personal resources should be, and they might actually stipulate a specific amount as a requirement. Our final point in this area is that certain of the loans and financing we discussed require several key ratios to work from a viewpoint of debt, equity, and working capital, so the reality is that some of these ratios will actually ‘drive‘ what your personal investment is required to be.
Franchising is booming in Canada, there are some great opportunities. Investigate which one makes sense for your interests and skills, and set out to properly plan and finance your business with the information we have shared.
