Financing Franchises Q&A with Stan Prokop

Stan Prokop is the founder of 7 Park Avenue Financial. The firm specializes in business financing for Canadian companies in the areas of working capital, asset based lending, SR & ED tax credit financing, equipment financing, franchise financing and banking.

He’s also a Platinum author on my website – you can check out his articles here. I asked him 8 questions about how to finance franchises.

1.) How does one factor the cost and return on investment of franchising finance loans?

Traditionally business folks measure an ‘ ROI ‘ by analyzing their profits relative to the amount of capital in their business. In Canada franchises of all size are available for purchase , from an investment of a few thousand dollars to the several million dollar range .  If you finance a purchase by a large amount of debt and little of your own money , and the franchise does well you will be achieving a great ROI . On the other hand if you put a  lot of your own capital into the business and your profits are low, ( or non – existent ) your ROI  is of course … not great!  Probably the right answer to all of this is to borrow at rates  and amounts you are comfortable repaying, and that your own money (  ‘capital”) in the business is an amount you are comfortable with and has a reasonable expectation of earning returns that are  satisfactory .

The key take away here is that ROI ( return on investment ) is a concept that can be used by CFO’s of major corporations, or would be entrepreneurs in Canadian franchising.

2.) Can you provide basic tips on how to buy and finance a franchise?

Having helped finance over 100 entrepreneurs and total financings in franchise finance of 25 Million dollars we are  always amazed at how basic and simple it can be to buy and finance a franchise. So the ‘ Readers Digest ‘ version of our answer would be as follows :

- Do your homework on a franchise that fits your skills, interest, experience and financial capabilities

- Plan well via a solid business plan that accurately reflects the financial potential of your business

- Investigate carefully the resources you have for financing and general business advice

- Understand the criteria for both purchasing  and financing your new business : amount of personal investment required, financing options to buy the business, growth and working capital needs to operate and grow your business.

3.) How can entrepreneurs be successful with franchise financing business lenders?

In both our discussions with clients and on our Business Blog we refer constantly to that time worn Boy Scout motto – ‘ Be Prepared’.  So presenting your business case in a professional and complete manner that demonstrates you understand the upside and downside of business risk is key . We meet many clients that have spent weeks/months in a frustrating process of satisfying basic requirements that could be addressed succinctly, once.  Also, entrepreneurs seem to forget that lenders are interest in only one thing, repayment of the loan . They aren’t equity partners with you, and your upside isn’t theirs. So focus on cash flow, working capital , and debt repayment which can be demonstrated and defended by yourself.

4.) How do franchising financing companies work?

That’s the $640,000.00 question !  This is Canada , and there is really only one franchise financing company in Canada that is a subsidiary of a multinational U.S. corporation . As a general rule this firm favors larger chains with well known brands that have a large number of units .  Requirements for financing focus on cash flow and owner equity .  Hundreds, if not thousands of Canadian franchisees’ finance their business in another manner,  via the Governments Small Business Loan Program . While we’re quite sure the program didn’t originally contemplate being the financing of choice for Canadian franchisees it has certainly become that.

We supplement franchise financing via  a cobbled together approach, utilizing asset and lease financing, small business lines of credit, and merchant advance facilities .

5.) What types of loans are available for a franchisee when financing a franchise?

As we noted, the government  BIL/CSBF loan is the most popular method of franchise financing . It’s a term loan that combines principal and interest payments on a  5-7 year term loan . The program finances equipment, assets such as computers, software, etc, and even real estate . However , the most powerful aspect of the program is that it finances leasehold improvements, which are typically a challenge in business financing . Equipment financing , aka ‘ leasing ‘ is also available for selective assets on a typical 3-5 year term .

6.) What should every entrepreneur know about regarding financing a franchise?

That’s a bit of a general question but what we can say through our own experience is simply that finance options to acquire a franchise  in Canada are not unlimited, that’s for sure , but that utilizing the financing options we mentioned success is achievable .

We’re generally not big fans of the common statement that  franchisee’s are in effect ‘ buying a job ‘. Franchisees we meet come from all walks of life, have often put their personal resources on the line ( homes, savings, etc ) and are clearly committed to the entrepreneurial vision.  They should also know that going it alone can be both lonely , and frustrating . So by working with an advisor , their accountant, their mentors, or acquiring info from sites such as evancarmichael.com the road to success is a combination of easier and faster.

7.) How should one deal with franchising lenders successfully?

We’re keenly aware we might sound like a broken record sometime, but its simple really . Understand the criteria for financing , don’t bite off more than you can chew re: business risk, make sure you have the appropriate amount of equity and debt , have a basic solid business and financial plan, and present yourself in a professional manner .

8.) How long does it take to get a loan for a franchise?

For us and our clients, 48 hrs. Surprised?  Franchisees that have spent weeks and months of frustration sure are . The reality is that once you have understood and documented criteria for franchise financing it’s simply a case of submission and approval . It’s getting to the submission point that’s the challenge! Working with an expert sure helps speed the process also , whether that’s a business financing advisor such as our firm or a banker or commercial finance firm  that understands and can fast track your franchise package .