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Archive for March, 2010

Franchise Financing Canada – The Reality

Tuesday, March 30th, 2010

Franchise financing is a large part of the decision to purchase a franchise in Canada and grow and profit that business. Canadian franchisors themselves, rarely, if ever, provide the financing for you to purchase your business. That should not be a mystery to the entrepreneur, because the

Franchisor uses your funds to continue to grow their franchise empire! That’s how franchisors prosper, grow, and build and sell more units. Many franchisors use funds received from your investment, build a company store, and then sell it as a franchise. This is a very strong and proven business model – so the bottom line is of course – You are on your own with respect to franchise financing.

It is important therefore for the business person to take some careful time and plan around how they will arrange their franchise financing.

Naturally at the same time you want to due a fair amount of due diligence around the basic finances of the franchise you are looking at. By that we mean that different franchises require different levels of capital. For example if it is a purely based ‘SERVICE ‘ franchise then you can expect that financing costs, and therefore your own investment will be significantly smaller than a business requiring more assets and capital expenditure .

As a prospective franchisee you have many legal rights around the financial disclosure that is made to you by the franchisor. You should therefore ensure that you use all options and information available to yourself with respect to understanding how the franchisor is financed, what type of financing is generally needed and recommended from yourself, and what affiliations or efforts a franchisor might make with respect to assisting you in financing the business. We have said very clearly that franchisors won’t provide you the financing, but based on their success and reputation in the market place they might be in a position to have set up a program with lenders in the marketplace such as banks or independent finance companies.

We strongly recommend that if business owners considering buying a franchise don’t feel 100% comfortable with financial jargon, current market financing conditions, etc, that they should engage the services and advice of a trusted financing advisor with expertise in Canadian franchising .

References with respect to financing should also be checked, by that we mean that in your discussions, negotiations, and disclosure made by the franchisor you should obtain a strong sense of what general financial performance you can expect from your investment. If you think you wish to grow a million dollar business and your investigations reveal that no other unit in the chain is close to approaching that revenue number, well, you get the picture, right?? Time to re think your investment and your proposed financing.

Every business and industry has an acceptable debt and equity ratio. By debt and equity we of course simply mean how much you are going to put in, and how much you will borrow. You want enough working capital and cash flow to grow your business, but you do not want to become over leveraged. That’s the balancing act in any business quite frankly.

In Canada franchises are primarily financed by your own investment in the business, as well as the Governments CSBF program. This is a solid
loan program used by a huge proportion of Franchisees in Canada.

Our firm has found that a combination of the entrepreneur investment, the CSBF loan, as well as some innovative leasing and working capital
strategies allow the franchisee to be adequately financed , therefore providing a much stronger chance of business success and profits!