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Financing a Franchise Via Franchise Loans in Canada

Guest post by: Stan Prokop

Article Overview: Canadian franchise financing tips and knowhow -Information on how financing a franchise via franchise loans and other finance vehicles works in Canada . What is the proper mix of debt and equity in franchise financing .

Financing a Franchise Via Franchise Loans in Canada

Financing a franchise via a Franchise loan or lending arrangement is probably the 2nd largest concern that any potential Canadian entrepreneur has - (we are assuming pick the right type and size of business is the largest concern?!).

So let's assume that as a Canadian entrepreneur you wish to either purchase a new franchise, or in some cases purchase an existing business that is has already been in business and being sold by the new franchisee. There is actually a third scenario also, in that you might already be a franchisee and wish to either purchase another unit or invest in another franchise business within a different industry .

The bottom line though is that after you have made that decision financing of your new business quickly becomes 'job 1'. The challenge is two pronged of course -

1.Finance the purchase of the franchise

2.Ensure you have a solid understanding of the long term financing needs of the business from a view point of increased investment required for growth, survival, and continual profitability. ( A good example is if you are purchasing a restaurant franchise - you should clearly investigate what further upgrades to leaseholds and equipment might be required for you to maintain your franchisee status , or simply to grow you business and stay ' fresh ' at the same time .

In Canada you certainly don't have what we would call 'numerous 'choices to finance a franchise, but there are several what we will call strategies or programs that can assist you to complete financing successfully. We tell clients that we can't over emphasize the importance of dealing with a trusted, credible, successful and experienced advisor in this area. Just on piece of advice or experienced from such a party can save you thousands and potentially save the regret of having purchased the wrong business, or financed it incorrectly.

We recently met with a client who had chosen what we will call for confidentiality reasons a 'service' business. The business was financed all through personal equity - that simply means of course that no funds were borrowed. Sounds good so far right, wow... a business with no debt. Well, here's what happened, sales didn't materialize, cash flow dried up, all personal resources, including sale of the family home, had disappeared. And the business was no longer financeable from a loan perspective because of the poor fundamentals. In reality the business should have been financed with some debt, so that any shortfall in revenues could be augmented with personal resources for a temporary period.

So how are franchises financed in Canada? ask our clients . They are financed via the following mechanisms -

-Owner personal investment

-A special loan guarantee program by the Canadian federal government

-Lease financing for equipment

-Some for of vendor take back in certain unique situations

-Cash working capital term loans to augment the owner investment

In a very small, and we repeat, small! Number of situations the franchisor themselves might provide some financing. This is rare and should never be counted on - for the simply reason that franchisors make their money selling franchises, not holding and financing them.

So lets recap our basic shared information - it's simply as follows: Carefully pick a franchise that suits your skills, interests, and financial investment profile. Ensure you properly mix the right amount of debt and equity - too much of either is rarely a good thing. Work with a trusted business financing advisor in franchising to ensure you avail yourselves of the proper mix of the 5 methods we outlined above. That's a successful Canadian franchise financing loan strategy.

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



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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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