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Financing a Franchise – Whats the Deal on Franchise Financing in Canada?

Guest post by: Stan Prokop

Article Overview: What you need to know about Canadian Franchise Financing; Information on what entrepreneurs need to know around the availability of franchise financing in Canada. What are the risks and rewards around financing a franchise properly in the Canadian environment?

Financing a Franchise – Whats the Deal on Franchise Financing in Canada?

Minor details. You have made the commitment to purchase a new or existing franchise in Canada and must attend now to that final detail - you need to figure out how financing a franchise works in Canada! Franchise financing is a specialized industry in Canada, and your ability to investigate and source and finalize the proper franchise financing will of course be one of the reasons for your success as a Canadian entrepreneur operating within your franchise segment.

Whether you are Canada's largest corporation, or the owner of a Canadian franchise its all about debt and equity. Simply put it's the balance between how much you will borrow and how much of your own funds will go into the business. The franchise finance landscape in Canada is littered with many cases of business owners who did not match up, so to speak, the right amount of debt and equity.

There is an interesting point we can make about whether there is in fact a perfect formula or combination to the optimal amount of borrowing or personal funds that go into your new business. It's a financial concept called R O I - which stands for return on investment. Let's use a simple example to illustrate our point. If a franchise cost you one hundred dollars, and you paid all cash for it with personal funds and your profit in the first year was one hundred dollars then your overall return on investment is not great, as you can see. . However, if you borrowed 90 dollars, and put in ten dollars of your own money and your profit was that same one hundred dollars then you have generated a ten fold return on investment.

So that's a good thing , right - well not necessarily, because your business has a lot more debt than ownership equity, as a result you are deemed to be very leveraged - if sales go down or profits aren't achievable the owner has , in the creditors eyes, very little stake in the business .

Enough though of some of our textbook financial analysis we have just illustrated - what happens in the real world of franchise financing is what our clients want to know. The reality is that over the past several years, due in part to the current poor financial environment, owners have been obliged by lenders to put more and more equity into a new franchise. Although in some cases a 10% down scenario is possible, the reality is that number approaches 30-50% in most situations.

So a large part of the planning around financing a franchise should involve a couple things; your business plan or cash flow model should understand what amount of debt the business can handle, and in particular you should also understand the working capital needs of the business. It is not recommended to only focus on buying the business, as sooner or later you will have working capital or growth needs, so take that into account also.

Your financial planning around your financing should take into account the franchisors experience in the financial needs of the business - in a perfect world it is important to try and talk to some existing franchisees as to how their overall financing strategy works.

In Canada the majority of franchises are financed by a special federal government program called the BIL, or in some cases aka CSBF loan program. You need to ensure you meet the general criteria of this program. In our opinion no one financing method can really accommodate all your franchise financing needs, so we advise clients to consider a number of approaches including the above noted program, equipment financing where relevant, and in some cases a working capital term loan. Naturally all of this financing is under pinned with your own personal equity contribution into the business, which we discussed earlier.

So what is our take away on financing a franchise in Canada - there are a couple as we noted. Plan the financing of your franchise early on in the process and integrate it into your overall decision to purchase the business. Calculate what works out best for you relative to the ROI equation - what do you need to borrow, and what funds are available to put in yourself.

Speak to a trusted , experienced and credible business financing advisor in franchise financing to ensure you understand your financing options and that they can be presented to the lender in the best possible light . That's a successful Canadian franchise financing strategy!

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Article Tags: Canadian franchise financing, financing a franchise, franchise financing



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Re: Enticing Franchises - Top 9 List - All Franchise listed above are in millions of dollars. Do you have the list of Franchise in thousands
Re: Info for would be franchisers... - [quote="Sebastien":1d29sdv1]Like Franchise Times, Franchise Update is a very practical magazine. There is no blah blah, just straight facts that anyone in the franchise community can relate to. I just want to mention that all these magazines are NOT franchisee oriented. I mean these magazines are for franchise professionals. If you're looking to buy a franchise, you won't find much information in there. To answer your question, getting published in Franchise Times was fairly easy. I don't want to brag too much but I think I am known in the franchise industry. I was the marketing guy at Franchise.com for a few years before joining my new company, the World Franchising Network. So people know me and I have a very good relationship with Nancy Weingartner, the Managing Editor at Franchise Times. I was talking with her at the last Franchise Expo South in Miami and she mentioned she'd like me to be profiled. I was like "ok, sure!". I like this franchise executive profile thing in Franchise Times as it is rarely BS. People are usually really natural in there.[/quote:1d29sdv1] Thanks for the follow up Sebastien! And I can't say that I'm surprised that networking with the right people and managing your relationships with them properly are the keys to being published. I guess the old adage holds true of "it's not who you know, but who knows you" that's important.
how much for a franchise fee? - Dear Colleague There is no easy answer to this question. Things to consider: [list=] The sizeof the Franchise Clent base Expected Turnover Intellectual Property costs (recoup) Number of Franchises Number of employees Original Set up costs Franchise admin costs An example: A franchise that I was involved in setting was to a simple "lawn mowing/home repair" franchise. The Franchise included national/local advertising - preparation of client lists - general admin - central accounting etc The Franchise involved 300-500 clients - and an annual turnover of about $300,000 . The annual franchise fee was $30,000. Hope that this gives you some idea Take care Ian[/list]
Re: Franchise Surveys - Another good tool to researching a franchise is to speak with their existing franchisees. This contact information is included in most Franchise Disclosure Documents. In order to get a Franchise Disclosure Document or FDD as it is often referred to, you will have to complete a basic franchise application. The franchisor will then usually provide you with the FDD at that time. Included in that book of information is a list of the existing franchisees, the contract, the investment information etc... This information is required by Federal Law to be disclosed to your prior to making a purchase. So be sure to do your research and start with the Franchise Documents to get the initial information.
canada resources - I used to have a connection to a franchise consultant in Canada at "Franchise Officer" in Toronto. I wish I could remember his name ( but I can check my files at the office tomorrow). Anyway, he had a lot of connections to banks in Canada. He may know of them and may be able to offer some feedback. If you are looking for a business loan, Canada has similar business loan programs to that of the USA's Small Business Administration (SBA). I think its SLBS in Cananda, and I probably have the list of it's lenders in my office also. Do you think either can be helpful? If so, I can get back to you with this information tomorrow. Let me know!


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