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How To Finance A Franchise – Your Options and Risk

Guest post by: Stan Prokop

Article Overview: Options, strategies, and information on franchise finance

How To Finance A Franchise – Your Options and Risk

Entrepreneurs who wish to purchase a new or existing franchise are always asking us 'What are my Financing Options?". The ability to choose the right financing option (in reality it is the right mix of financing options) is one of the most important aspects of your entry into the purchase and running of a successful franchise in Canada.

It is of course very rare that a franchise can be purchased for all cash, as the amounts involved can be very significant. And in fact, as we will demonstrate, in many cases that would actually be the wrong thing to do. Even the largest and most successful corporations in the world take on debt, there is good debt and bad debt of course (as consumers we now that also. By utilizing the right mix of debt and your own equity you can properly 'leverage' the business for greater rewards and returns.

We will use a quick and somewhat blatant and unrealistic example just to illustrate our point. Let's say that you wish to purchase a franchise for 250,000.00, which is certainly not an uncommon amount. You have the option of paying cash for it (lets pretend!), or you can put 10,000.00$ down and borrow the rest. At the end of one year your franchise nets 20,000.00 in net income, let's assume. If you had only put in 10,000.00$ of your own money you have generated a 200% return on equity. Even Warren Buffet would be jealous of you. However, had you put in 250,000.00$ of our own money you can clearly see you have many years to go before you get a positive return on your significant initial investment.

So whats our bottom line - it's simply that debt and the right amount of leverage can be a good thing, and it's an excellent way to measure the potential returns in any business, including your investment into a Canadian franchise.

Let's return to our core topic, financing your franchise. The reality is that are several options in Canada to finance your purchase. Those options can relate to either a new or existing franchise - both are quite financeable. One of the main reasons you might wish to consider purchasing an existing franchise is that in some cases the track record and the assets in the business might present an easier case for financeability.

Franchise financing in Canada is absolutely a specialized type of financing. When we sit down with clients to evaluate their options d and focus on the quickest and best way to achieve franchise financing success we can summarize your financing options in the following manner -

-Government Small Business Loan - (By far the most common and popular)

-Your own personal equity or down payment (typically from 10-50%)

- Equipment and asset financing

- Working Capital Term Loan

- Operating facility for ongoing requirements

- VTB - (Vendor take back) - in some cases the franchisor or the seller of the current franchise will waive full payment and agree on a final pre agreed upon payment to be made at some point in the future

Whether you consider yourself financially astute, or if you are concerned and worried that you don't know enough about financing in general, it is strong recommended you align yourself with a trusted, credible and experienced advisor in franchise financing. Understanding your options, picking your options, and executing on those options within your timelines is the key to franchise financing success.

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Article Tags: franchise finance, franchise loan, how to finance a franchise



Related Forum Posts
Re: Finance is the primary requirement of business - [quote="rauljoseph":36x8dadn]Finance is very important in a business. It is all about managing the business' money and other assets. Finance includes the study and analysis of processes, financial institutions, markets and instruments that are involved in the transfer of money or anything that has a monetary value among consumers, businesses and government.[/quote:36x8dadn] Good point. I'll just add that if I was going into business for myself and could only have one skill it would be Sales & Marketing. You need to be able to create customers first and foremost. Finance is more of a support function for entrepreneurs.
Finance is the primary requirement of business - Finance is very important in a business. It is all about managing the business' money and other assets. Finance includes the study and analysis of processes, financial institutions, markets and instruments that are involved in the transfer of money or anything that has a monetary value among consumers, businesses and government.
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]


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