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What If … You Had All the Info You Need About Buying a franchise and financing a franchise in Canada ?

Guest post by: Stan Prokop

Article Overview: Franchise Financing Secrets for Entrepreneurial Success ;Information on what entrepreneurs need to know and consider when buying a franchise in Canada . Financing a franchise is a challenge and must be addressed in a multi-step manner as outlined .

What If … You Had All the Info You Need About Buying a franchise and financing a franchise in Canada ?

Canadian entrepreneurs can be forgiven for feeling overwhelmed when it comes to buying a franchise and financing a franchise once they have made that very significant decision to own their own business within the franchise model.

Being armed with critical information about financing a franchise is a key part in your overall success when you purchase a business within the franchise model.

The excitement of owning your own business and finding a solid opportunity is often very quickly overshadowed by the entrepreneurs concerns that financing prospects might be limited. When we talk to clients about their desire to purchase and finance a franchise we try and make it clear that franchise financing is Canada is a specialized part of the overall business financing landscape. Given the specialization we strongly recommend to clients that they seek the services of a trusted, experienced and credible franchise finance expert to assist them in their overall acquisition strategy.

Start up Capital in franchise financing at the same time is no different than if you were starting a business in any other industry. That original capital comes from you as owner and from a lender or lenders as debt, or loans, etc. Many potential franchisees in Canada cannot get off the ground because the franchisee is unable to properly document their business track record, as well as demonstrate some sort of credible personal financial history, such as a decent credit history. Most franchisors themselves, as well as your lenders will want to determine if you as a small business owner have handled your personal financial affairs in a credible manner. We therefore work with clients to present a net worth statement and credit bureau documentation which allows us to at least get out of the gate in a positive manner.

So you have focused on a specific franchise, you have done your due diligence, and we are now at the point of implementing a finance strategy. If there are any secrets we share with clients around franchise financing it's simply that it is rare, in the current environment, for one particular method of financing to access all the capital you need. Therefore a carefully crafted business plan that outlines your own investment and your proposed sources of capital is critical in a franchise finance strategy.

We can't over emphasize the requirement for a business plan. It doesn't have to be 100 pages long with pictures, but it sure better include info on yourself and your experience, the proposed business, how you will finance it, and some reasonable credible projections around sales, expenses, and projected profits. Typically we find that a 3 year projection is satisfactory. One of the mistakes many owners make is that they focus on getting the business, and not fully getting into how the business will finance itself on a day to day business, allowing for future growth. So focus on both, that's important.

The ability to present your business plan and finance proposal in a confident and positive manner is key, if you are not comfortable doing that seek the help of an experienced franchise financing business advisor who can work with you in every aspect of the plan and its presentation.

One of the big mistakes we see our clients make is that they feel they can rely on the franchisor, your new business partner so to speak, to either provide or assist in the financing of your new business franchise. The reality is that they are in the business of selling franchises, not financing them, so you must stay much focused on obtaining external financing.

So lets get on to another ' key secret ' we are sharing about franchise financing in Canada - which is simply, how are they in fact financed . If the words 'BIL ', CSBF Loan, and SBL mean nothing to you that is not a surprise to us. All of these terms are acronyms for the government's small business financing program, under which the majority of franchises are financing in Canada. In our own experience it necessary to complement that strategy with potentially several others, which include a working capital term loan, equipment financing where applicable, and, in the case of you purchasing an existing franchise, a vendor take back from the current owner.

It is true that the majority of businesses in Canada, franchise or other are financed by borrowed funds, i.e. 'Debt '. But you must make a personal investment in the business also. This tends to be one of the biggest challenges clients come to us with, which is simply the question - ' How little can I put down to acquire this business '. The answer to that is a couple of things - first , it actually doesn't make sense to finance the entire business with your own funds, so borrowing for leverage is good, because it essentially increases your own return on your investment . The other point is that the franchisor has track record and experience in knowing what a typical franchisee investment of personal resource should be, and they might actually stipulate a specific amount as a requirement. Our final point in this area is that certain of the loans and financing we discussed require several key ratios to work from a viewpoint of debt , equity, and working capital, so the reality is that some of these ratios will actually ' drive ' what your personal investment is required to be .

Franchising is booming in Canada, there are some great opportunities. Investigate which one makes sense for your interests and skills, and set out to properly plan and finance your business with the information we have shared.

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Article Tags: buying a franchise, entrepreneurial success, financing a franchise



Related Forum Posts
Hello I am a franchise expert - Hello, I recruit franchise owners for successful franchise concepts based in the USA. Many of my franchises are looking to expand north to Canada in all major centers. I enjoy networking and answering questions about franchising. If anyone is interested in the franchise world or looking to buy a franchise then contact me. I have a wealth of information and like to help. Thanks for your time. Michael Somer
Re: Fed rate cuts . . . - Prime may be down but the Lender's tightened up, so the rate going down really doesn't help the avarage Joe or the fair credit borrower. Seems that pro-franchise Lenders all over the country all raised their standards. Where I used to be able to get someone franchise financing with a credit score of 650 and minimum collateral (30- 40%) with little management experience or no direct industry experience; the Lender's now want credit of 670+ and 50 - 70% in collateral on a minimal level (depending upon the lender and the franchise) and they are all requiring stronger & related experience (industry experience preferred). New franchises to the franchising industry are very hard to get financing for, unless you are a really strong borrower with strong related experience. If you are opening a restaurant franchise, the lenders want to see you have restaurant and management experience. Lenders also want to see a long track record with a franchise and they want to see 75+ units up and running successfully before they put down their guard. These are truely tough lending times and i don't really think the lower rate helps the avarage person.
Re: Introducing a US franshise to a Canadian market - When franchisors begin to expand outside of the United States, Canada is one of the first areas they consider because: 1. Similar culture 2. Same language in most of country 3. Some provinces require registration, but it is not considered too difficult. 4. An economy that generally mirrors that of the United States (may be different currently) The main cost for a franchisor would be contracting a Canadian franchise attorney to convert their legal documents to meet Canadian law, then reprinting their marketing material. If a person sees a franchise they like, that is not currently in Canada, they might approach the franchisor and ask about becoming an area developer for the franchisor. I don't think that most franchisors would not sell a master franchise in Canada, in which the franchisee takes over the entire country, because Canada is such an opportune areaa, but by becoming an area developer the new franchisee could have the right to develop/sell several franchises in a given area.
How Do I Start Franchise? - How do I start a franchise? Before one can start a franchise it is important that you do your homework and research your market thoroughly so that you know what you are getting into. To start a franchise, it is vital that you: First, investigate all the franchise opportunities available to you by visiting franchise trade shows or by contacting a franchise agent. Also talk to family, friends or relatives who have set up a franchise, or who know some one who has set up a franchise. It is good to get as much information as possible from fellow franchisees, as not all franchises are good investments Second, talk to franchise owners that are in a franchise similar in to the one you would like to invest in. Ask them if they are pleased they are with their decision, and how well their business is doing. Is it meeting their expectations? Also ask questions about the franchiser and how responsive it is. It is important to determine the integrity of the franchiser you are interested in doing business with. Third, consult any and all advisers. Have an accountant review the audited financial statements the franchiser presents you with, and bring in a lawyer to help review all the legal documents before you sing them. Fourth, thoroughly read the Uniform Franchise Offering Circular, which is a disclosure document in which the franchiser must release certain information such as, any and all administrative, criminal or civil litigation currently pending or completed against the franchiser involving allegations of fraud or misrepresentation. It is a recommendation of the FTC that all franchisers supply a UFOC to prospective franchisees. Also make sure to verify and confirm the UFOC facts. Do a background check on the history and experience of the franchise and its employees. Fifth, compare other franchises. Look for franchises similar to the one you are interested in investing in, and see how well they are managed and financed. Sixth, know and be fully aware of all the terms and conditions of the purchasing contract you are about to sign. Seventh, research as much as you can. Buying a franchise is a complex process and should be approached with caution. The more information you know, the better it is for you. Remember, only you can determine if owning a particular franchise is right for you. When starting a franchise it is key that you evaluate yourself and see if a franchise is the right business investment for you. Investing in a franchise should not be taken lightly as it can be a risky business. It is important that you consider all the facts before you make a decision to invest in a franchise.
Re: Franchising Brokers vs Franchising Consultants - Franchise consultants are free and work with you without any obligation. they do not work for any one franchise but do get a percentage of the franchise fee when a franchisee that was registered with the franchise came from the consultant and the franchisee signs. They will try to match up your interests and skills to franchise businesses that are right for you. They can explain franchise guidelines and help you in any way they can. Franchise brokers usually get paid by the client and/ or franchise (generally get some type of commission). Additionally, they can get points or referral fee off the deal if they refer you to a lending resource too after they sell you on a franchise. Typcally they will try to sell a prospective franchisee on a larger deal so they get a larger commission.


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