How to buy a franchise Researching & planning your investment
If you fail to plan, you plan to fail, as the saying goes. Richard Holden emphasises the importance of business planning during the acquisition of a franchise and provides a banker's eye view of the process of lending on the franchise investment
A wide range of businesses from diverse industry sectors have chosen franchising as their favoured way to achieve their expansion plans. A major benefit from the franchisor's point of view is that they are looking to recruit motivated people to help their business network grow, but a franchisor's success is closely linked to the way the franchisees in their network operate their businesses. However, the support given to franchisees varies widely and it is therefore essential that anyone considering franchising should thoroughly research the different options available to them.
A major attraction of becoming a franchisee is that many of the risks that starting a new business are reduced. This is largely due to the fact that franchisees are investing in tried and tested business with a proven track record of success. They will work for themselves with initial training and continuing support from the franchisor.
Running a business takes a lot of hard work, commitment and self-motivation. Franchisees must be prepared to follow the franchisor's systems and operate in accordance to the terms laid down in the franchise agreement. There will be restrictions when they eventually come to sell the business. Although it's true that franchised businesses receive support, in reality the franchisee will be working for themselves and it's important that they don't underestimate the heavy toll that starting a business can take on family life.
Banks can provide valuable guidance and will be able to point people in the right direction to obtain the professional advice and support they need in making their decision. Lloyds TSB has produced a list of 35 key questions investors should be asking the franchisor to help their research. Common sense will take people a long way in deciding whether the franchise they are considering is right for them.
Eliminating unsuitable opportunities is relatively easy as most people will know whether they wish to be an owner/operator or manage a team. They should also have an understanding whether they wish to run a business from home, an office or a vehicle and have a financial budget to operate within. Once the options are narrowed down to a handful of suitable opportunities these will require further in-depth investigation.
Of course, franchising is not right for everyone. For people who value independence or want to run a business without restrictions franchising might not be the right option. Anyone considering investing in a franchise should be prepared to ask some probing questions of the franchisor. Their responses will assist you in deciding whether the franchise is right for you or if they only seem interested in taking your money and not supporting you develop your own business. You should be prepared to walk away if you are not 100 per cent comfortable with the proposed investment.
Finance may be required to help set up the business. It is important that you are realistic in your expectations and have considered the amount and source of your own capital commitment. Banks generally expect a personal commitment from a customer of around 50 per cent of the start up costs. However for well established franchise systems banks may consider financing up to 70 per cent of the total set up costs including any working capital requirement.
There is truth in the old saying 'If you fail to plan, you plan to fail', especially when you're starting a new business. People who understand the benefits of business planning are much more likely to be successful than those who react to day-to-day issues and stagger from one crisis to another. Business planning is not a simple matter of scribbling down a few ideas. If a franchisee is going to make their plan work, a much more thorough approach must be adopted. Banks can provide a template which will help you construct a strong business plan.
A business plan is a useful tool to help gather thoughts and to set objectives for the business. Lenders will want the franchisee to demonstrate that they have a good understanding of the business and its financial requirements. When considering the financial aspects of the business plan it is best to build in a contingency of at least six months' and preferably 12 months' expenditure in case the business takes longer than anticipated to get off the ground.
The lender will ask questions about the plan, so it is important that the applicant will be able to answer these confidently. They may ask for some form of security to cover the amount that they are prepared to lend.
A business plan is a working document against which the business's performance can be measured. The planning process will help the franchisee get to grips with their business and set clear objectives. Naturally as the business develops the plan should be revised and updated. It is important that the bank manager is kept informed with progress of the business so that when more help is required they are ready to provide a quick decision. Banks with a specialist Franchise Department, such as Lloyds TSB, are best placed to meet your initial and ongoing banking and finance requirements.
In general terms, start up costs including the franchise package fee and the purchase of business assets would be financed by way of a loan. Working capital is provided to bridge the period when the business needs to pay suppliers for stock and the running costs of the business, such as salaries and trading overheads, until its debtors pay for the product or service. Cashflow varies widely between different types of businesses and banks will support this type of finance through an overdraft facility.
There are other forms of finance which banks can assist you with. Asset Finance may be available to purchase vehicles or equipment and debtor finance may assist with cashflow pressures. Terms of finance with the bank will depend on the amount borrowed, the strength of the business plan and the value of security being offered.