The decision on the best way to finance a franchise business will depend on a wide range of factors, all of which will need to be carefully considered by the applicant.
It is always recommended applicants engage with their financier early in the process. They should discuss the equity and cash contribution requirements, estimated loan repayments and other conditions. In this way, any issues can be quickly identified and understood. Outcomes can then be covered off in the business plan, which is the key supporting document. Applicants who are fully transparent at this early stage will have a better understanding of their borrowing capacity and will be less susceptible to surprises later in the process.
Anyone considering approaching a bank or other financier needs to understand the loan assessment process and the information they will be required to provide.
A typical checklist will include
- Comprehensive business plan (refer to comments below).
- A copy of the proposed franchise agreement.
- If a greenfield location, a detailed breakdown of set up costs.
- If an existing business, the previous three years accountant prepared financial statements/tax returns plus management accounts covering the period since the end of the last financial year. Also required will be a copy of the business contract of sale, BAS statements (2 years) and tax portal printouts (min 12 months).
- A curriculum vitae for all owners including background, experience and qualifications.
- Copy of proposed lease agreement.
- All personal tax returns for the last two years.
- Last 12 months home loan and personal transaction account statements.
To support an application time needs to be taken to fully understand the business and develop a comprehensive written business plan outlining
- Description of the business
- Location and or business territory
- If an existing business, detailed purchase price and how this was determined
- If a new business, detailed set up costs including stock and working capital requirements
- Historical financial performance
- Financial Projections, including detailed assumptions covering 12-24 months.
- Historical financial statements with justification for any recommended add-backs to profit. Including depreciation costs, interest expenses etc. to arrive at an adjusted operating profit.
- Details of the due diligence process undertaken by the applicant including supporting documentation from an accountant and lawyer who specialise in franchise businesses
- Refurbishment and upgrade requirements.
- Estimated costs and timing for planned capital expenditure
- Impacts of business competition
Financiers will require time to meet with the purchaser and understand the business proposal. They will also need to consider the business risks and support provided by the franchisor. Applicants can assist in this process if they prepare for the meeting and able to explain the business plan and provide supporting documentation.
Applicants should consider their ability to contribute additional capital should it be required to reduce their risk. This cash may be needed to cover an unexpected event or situation. Financiers are reluctant to lend where the applicant is fully geared and does not have any capacity to raise additional funds should this be required. For example, an unexpected weather event or local issue could temporarily reduce business turnover and impact the applicant’s capacity to meet ongoing obligations to suppliers, landlords, staff, financiers etc.
Whether establishing a new outlet or purchasing an existing business ingoing costs and working capital will need to be considered and documented. Landlords may require a bank guarantee to support the lease obligations. Financial requirements to consider include, legal fees, accounting fees, due diligence costs, stamp duty, training, fees levied by the franchisor and retaining a sufficient level of working capital. This working capital should take into account any start-up period and seasonal aspects.
The loan term and repayments will depend on the expiry dates of the franchise agreement and lease for premises.
The applicant’s cash contribution should be supported by documentation (Bank statements etc.) If the source of the cash contribution is a gift or ‘early inheritance’ this should be supported by confirmation from the donor that the money is not repayable and without any interest. This information is required to ensure equity ratios and loan repayments can be correctly calculated.
Some franchise systems may have a franchisee finance arrangement in place with a financier. This may allow an applicant to borrow using the business assets to secure the loan. These arrangements will vary from financier to financier and situation to situation. The franchisor will be able to advise if these arrangements are in place and provide contact details for the respective franchisee finance specialist. Applicants will still need to provide the information and demonstrate their due diligence and understanding of the business opportunity.
With all requests for finance, providers will look for applicants to fully commit all of their assets in support of the business loans. This would include their house and any other property.
Financiers need to consider all aspects of the applicant’s financial position. This extends beyond the business and includes a detailed analysis of the applicant’s available income and expenditure. This includes personal expenses, living costs, rent/mortgage repayments, credit cards, telecommunications costs, transport costs, education, medical and insurance etc. It will be necessary to provide estimates of these costs, which will be based on historical evidence. This will be used in the assessment process to calculate the capacity to repay the loans sought.
Relationships can’t be outsourced. Even when engaging specialist accountants, lawyers, brokers etc. it remains the primary responsibility of the applicant to be fully engaged in the process. These key relationships include financiers, landlords, suppliers and the key businesses customers etc.
In closing, finance only one part of a business’s financial requirements. Applicants will also need to consider transaction accounts, GST holding accounts, credit card and EFTPOS merchant services, payment and receivable systems etc. These should be discussed as a part of the finance package.
Consider the total package and not just the interest rates and fees. Look for a financier who offers a full range of services and is easily accessible.
Additional information is available at Westpac’s Davidson Institute to see website located at https://www.davidsoninstitute.edu.au.
Steve Seddon is Westpac’s, Senior Manager Franchising. He is a CPA and a member of the Franchise Council of Australia’s Western Australian Committee.
Westpac continues a long-term commitment to the franchise sector in Australia. The bank has a national network of franchise specialist business bankers who can assist in the specific needs of the franchise sector.
Contact Steve at:
0407 401 892 firstname.lastname@example.org