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Financing Your Franchise - Interview with Stan Prokop #4

Guest post by: Evan Carmichael

Article Overview: Stan Prokop is the founder of 7 Park Avenue Financial. The firm specializes in business financing for Canadian companies in the areas of working capital, asset based lending, SR & ED tax credit financing, equipment financing, and banking. Stan has been a top author for my site and I decided to ask him a few questions to learn more about him and how he helps entrepreneurs grow their businesses.

Financing Your Franchise - Interview with Stan Prokop #4

Can you describe for our readers what your experience has been helping franchisees finance their businesses?

We’ve been in business 7 years now and recognized early on that franchising and franchise finance was a large growth opportunity, given that sales through franchises represent a very large portion of the Canadian economy. We’ve originated a total of close to $25,000,000.00 in franchise financing, representing approximately 100 individual transactions. In fact our 2^nd client ever was a franchise transaction.

Can you provide basic tips on how to successfully finance a franchise business?

Although we could term franchise financing as a ‘ niche ‘ sector of Canadian business financing a lot of the requirements of any business finance transaction pertain similarly to franchisee finance. We often use the Boy Scout motto – ‘be prepared ‘as a good example of getting the job done right. In the case of franchise financing its selecting a solid franchisor as a partner, ensuring the financial model makes sense, committing some of your own capital to the transaction, and selecting a franchise business loan that make sense for yourself and the lender vis a vis mutual profitability.

What finance options are available for franchisees and how can they be achieved successfully with lenders?

In Canada many of the larger franchises work with an internationally known firm that has expertise and funding capabilities in large dollar franchises, those businesses that required millions of dollars of funding to get to a ‘ turn key ‘ state. That’s typically not the market we focus on though - we work with franchisees looking for funding up to the $500,000.00 range to acquire and open their business properly. These transactions are funded by the governments BIL program, working capital term loans, equipment and software leasing as applicable, and merchant cash advance funding if appropriate.

How does a franchise owner know which financing funding and which lenders are right for their business?

That’s always the challenge. It’s ensuring your have the right mix of debt and your own equity and as important, working capital and cash flow financing to ensure the business grows and grows profitably. Given that its ‘niche’ finance that we referred to previously, i.e. ‘ specialized ‘ its important to seek the help of an expert to ensure that the right capital structure is in place for the business. Ironically paying all cash and utilizing all your own resources to eliminate ‘debt ‘is in many cases not a great strategy. A proper mix of your own funds and borrowed money is usually optimal. You also want to work with an experienced financing advisor who knows the lay of the land and has fostered strong relationships with lenders specializing in franchise finance.

What are the practical issues franchisees face if they do not finance their franchise with the right lending?

That’s a great question. A lot of common sense basics come to mind, again, applicable to any business financing, but extremely relevant to franchise finance. They are as follows: be prepared to commit and organize some of your own funds into the business, showing your commitment to the venture. Have a well thought out business plan and cash flow forecast that injects reality and is based on your franchisors real world experience. No one option often provides 100% of all the financing you need, so ensure you are prepared to cobble together a couple different types of financing if that’s required. Finally, watch your timelines. We recently had a franchisee client lose his location with a mall because he did not have external financing arranged properly and in a timely manner relative to premises acquisition, etc.

Which franchise financing would you recommend, and why?

The government BIL program is, bar none, the best program for Canadian franchise financing. It provides rates, terms and structures comparable with what even larger corporations can achieve. Our firm is a specialist in that niche sector, and we’re even been recognized by Industry Canada for that reason.

Are there specific qualifications for franchise financing, and what are they?

Some common sense qualifications are some level of management or industry expertise relative to the franchisor you have selected. Franchisees with poor personal credit histories and a lack of any capital to commit to their new business are somewhat doomed to fail. We once had a manager who loved to say ‘I never met a forecast I didn’t like! We can only add that you need to be realistic in your sales and profit expectations and the amount of work required to get any business of the ground... successfully.

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