The dream is becoming a reality. You have selected a franchise in the Canadian marketplace. That franchise is either an existing unit or a resale from a currently successful (hopefully!) franchisee.
When you are contemplating the purchase of a business, the cost and financing of that business become a potentially major obstacle. Let's examine how financing a franchise works and is done in Canada. Who are the franchise lenders and what do you need to do to get your business financing past the goal line?
We recently read an article entitled 'How to Buy a Franchise With No Money Down'. Let's be clear on that point, that franchise financing is not available on the 100% OPM plan! OPM of course stands for 'other peoples money', and you should fully expect to make an equity investment or contribution into the business. That is driven by the fact that in business no lender will take all the risk and allow yourself to take none, which seems fair to us!
In your personal finances hopefully you are living within your means, as the expression goes. When it comes to business, and financing a franchise you should have a general sense of the overall cost of the franchise acquisition and whether that number makes sense to you from a personal net worth and owner equity contribution. Bottom line; don’t expect to buy a 700k franchise with a 10k owner investment - that won't work.
So what is the magic number then? Fortunately, or unfortunately, that magic number of your equity contribution seems to have increased over the last several years. We advise clients realistically that they should be prepared to put in anywhere from 25-50% of the purchase of the business.
The bottom line is that a solid equity contribution from yourself equals less debt on your opening balance sheet, and that's a good thing.
We spend a lot of time with clients constructing the cash flow portion of the business plan for their franchise acquisition. That is because your revenues and expense must be accurately reflected, and out of those calculations flows your ability to service debt, i.e. make your loan payment!
By far the most tried and tested method for financing a franchise in Canada is a program that is underwritten by our good friends in Ottawa. That’s the government by the way. A program that is technically referred to as the BIL/CSBF program, (aka 'Small Business Loan') is the most popular vehicle for financing a franchise.
Clients are always asking what qualifications are required for the program. We can broadly summarize them as follows - a solid well-prepared business plan, some industry experience (we don't recommend that computer programmers buy a restaurant!), a decent personal credit history, and a, relatively speaking, good personal net worth, i.e. homeowner, etc.
One mistake many potential franchisees make is to think that their franchisor will become a franchise lender. That’s not the case - in case you haven’t figured it out now they are in the business of selling a franchise, not financing your dreams.
Financing is tough, whether you are General Motors or buying your first franchise in the entrepreneurship dream. Speak to a trusted, credible, and experienced business financing advisor who can assist you in your franchise finance strategy for success.
<H5>Financing a franchise franchise lenders</H5>
