Financing your franchise: An introduction

Cathryn Hayes QFP, head of business support at the bfa, shares how to make sure your franchisee finances add up, from upfront capital to deposits and ROI

As future independent business owners and prospective franchisees, it’s imperative that you fully understand the financial side of your potential new venture – both from a funding and business planning perspective.

Starting up

You will need to have some capital available to invest in your chosen franchise but you may not need to find the whole amount needed up front. Banks may lend up to 70% of the start-up costs for an established franchise, and for newer franchises the figure will probably be around 50%.

When you start your franchise, you will need to pay for various items, depending on what type of business you are going into. Premises can be one of the most expensive, especially if you need a location with good footfall, as rent and rates can be costly. However, if your franchise can be based from your home, then you will not have to cover those costs.

Other possible costs might include initial stock, stationery, computer equipment and software, or vehicle costs. Some franchisors will include the initial training and marketing launch costs within the franchise fee – others will charge a separate fee for those services.

It is essential that you understand what the upfront and ongoing costs will be, how long it will take for your business to reach break-even, and the living costs you will need until the business can support you.

The other important area for you to establish is how long it could/should take to recover your initial investment; a good franchisor will give you information based on historical performance, and you can check with existing franchisees as part of your research into the franchise.

Deposits

You could be asked to pay a deposit to show that you are serious about buying your franchise. This is fairly standard procedure, but you should take great care to ensure that you are fully aware of the conditions for a refund and what costs might be deducted.

British Franchise Association (bfa) rules state that member franchisors must return any deposit taken if the prospective franchisee does not go ahead – however, some expenses incurred can be deducted. Any deductions must be fully detailed and should NOT include indirect or ‘lost opportunity’ costs. Non-bfa members may have other conditions, so be very clear about what you’re agreeing to.

Business planning

You need to do your research to ensure that you know what you are buying into and what financial returns are achievable. One of the best ways to find out the facts is to speak to existing franchisees and ask them whether the initial projections provided were realistic and how their business is currently doing against budgets.

Really focus on the figures so you understand how your business will work. Questions to ask yourself might include:

  • If you are projecting turnover of, say, £100,000 in year one, how many customers will you need every week to achieve this?
  • Could there be a few months of very low income as you build the business up?
  • How will you fund your living expenses until the franchise is successful enough to allow you to pay yourself a wage?
  • What if your franchise is slow to build, do you have a contingency plan?
  • What happens if sales come in much faster than anticipated – a great problem to have, but could this cause cashflow problems and put strain on the business?

Once you have a good idea of the costs involved, you will be in a better position to research and compare your options and should be able to start putting your business plan together.

A good franchisor will help you through many of these issues and support you every step of the way – but as a business owner, you need to fully understand the cashflow of the business and ultimately take responsibility for your own business plan.

Cathryn Hayes QFP is the bfa’s head of business support and was previously head of franchising at HSBC for more than 20 years.

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