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Franchise Financing in Canada

Guest post by: Stan Prokop

Article Overview: The articles discusses the current environment surrounding franchise financing in Canada .

Franchise Financing in Canada

Franchise financing in Canada has some major similarities to the U.S. market, but is different in some key respects. This article will explore some of those similarities and differences that we have observed in the marketplace. More and more entrepreneurs are of course looking at franchise financing for a combination of both employment and entry intro entrepreneurship under a reduced risk mode. That is to say that a proven franchise concept enhances chances of business success.

The potential franchisee has chosen his business, and has hopefully prepared either on his own or with professional help a business plan that ultimately has two purposes: to successfully finance the venture, and secondly, to monitor long term progress against initial goals and projections and assumptions. The business plan, when properly done, will allow the financing requirement to ' fall out' of the financials. That is to say that proper opening balance sheets and cash outlays will identify the total financing needed. The financials need to be specific in this area.

In Canada the majority of franchise financing is done under the auspices of the CSBF loan program. This is the equivalent of what our friends in the U.S. call the SBA ADMINSTRATION. CSBF stands for CANADIAN SMALL BUSINESS FINANCING program, and is a federal government program under the auspices of Ottawa. The important point here is the government has allowed the Canadian chartered banks to ' administer ' the program. The government in effect ' guarantees' the loan to the banks that participate in the program.

Franchise loans under the CSBF program have excellent rates, terms, and structures. Typically these are 3% over prime rate, 5-7 year terms, and flexible payment and repayment schedules. In the current liquidity crisis and market turmoil re bank financing etc many banks have either altered their view of certain elements of franchise financing, or in some cases have pulled out directly from certain business segments that they view as too risky, or in which they carry too much exposure. The restaurant /hospitality industry is a good example. A vast majority of franchise financing is done for the Canadian restaurant and hospitality industry.

Many business owners augment the CSBF franchise loans with HELOC's. ( Home equity lines of credit ) These HELOC's tend to backstop the funds put into the venture via the bank and government loan. Unfortunately many Canadian prospective franchisees have to tap into RRSP savings, which has some tax implications they should discuss with their advisor.

Franchise financing in the current 2009/2010 environment requires a solid owner equity investment. In some cases this amount approximates 100%. That has the bank loaning you $ 100,000.00 under the CSBF program, and you committing $ 100,000.00 also. This examples of course assumes you need $ 200,000.00 for your venture in this instance. Opening balance sheets prepared by the owner or their advisor and consultant should reflect positive working capital ratios that meet the government program requirements.

The CSBF loan program finances only certain asset classes, and owners should investigate or rely on their advisor or consultant as to what can be financed. Typically soft costs such as franchise fees are covered by the owner directly, and not financed. Franchise financing is more challenging today given that many lenders have either temporarily ( or permanently!) exited the marketplace. The franchisee should investigate all options thoroughly and understand what financing options are available and which options best suits their needs and personal financial situations. This can be done with proper due diligence or with an experienced advisor in the franchise financing industry.

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Related Forum Posts
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!
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.


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