How to buy a franchise when funds are tight.
This article appears in the January/February 2014 issue of Business Franchise Australia & New Zealand
Found the franchise you want but you are short on money – there are many ways you can potentially complete the purchase.
THE WORLD HAS CHANGED POST GFC
There are some great business concepts and franchise systems on the market and following the GFC both banks and franchisors have adjusted their requirements and techniques for approval and financing new franchisees.
The bad news is that banks have reduced their preferential arrangements for many franchise systems and are still applying fairly tough criteria for franchise funding.
In most cases unless you have sufficient equity in a property to cover the loan and an impeccable credit history, it is very hard to get finance approved and when you do the fees can be disproportionate to the loan amount and the terms can be very onerous.
The good news is many franchisors have recognised that without the ability to help new franchisees into their network, their franchise will suffer, so they are now more creative and more receptive to negotiating or demonstrating some flexibility on terms that pre-GFC many would not have considered.
In this article we will explore how you can still buy your preferred franchise business even if you don’t have all the money.
Before sharing these techniques and insights we point out that for any business purchaser it is important to be sufficiently capitalised – to have enough money and have some spare money to cover the unexpected contingencies that often arise in
business. If you don’t have the money you should have access to emergency funding or assets you can sell in a worst case scenario.
IDENTIFY THE FULL COSTS
So you have found the franchise business you really want but the price is higher than you can afford.
Before you do anything else, be clear on what the full costs of the transaction really are as franchisors and vendors often package the pricing in different ways. Some lead with a low headline number to attract interest but then it is plus plus plus for various related expenses and fees.
Others lead with a fully costed package price but even many of these fail to mention amounts that need to be factored in such as rental bonds for landlords, vehicle leasing costs and working capital needed to support the business as it builds.
The Disclosure Document will list all the costs you may incur in buying or running the business so get a copy as early as you can and go through it carefully. Most franchisors will list a low end and high end cost for many items. For example, fitout may cost $60,000 - $120,000. You need to be realistic about where your business will fall in these ranges.
If you cannot get the Disclosure Document early, then ask the franchisor/vendor to give you a full breakdown and itemisation of costs – they have the information but it is their choice when they release it to you as some will hold back until they are certain you are a genuine buyer. However from your perspective you need the full numbers as quickly as possible to know what you need to finance.
DETERMINE YOUR BORROWING CAPACITY
Even if you have most of the funds sitting in your bank account it is helpful to know your borrowing capacity and options. Interest rates are historically low so in this current rate cycle you may wish to borrow rather than use liquid funds.
For those without funds in the bank you need to know if you can redraw monies from your existing home or investment property loans or how much you can raise against the assets you have.
Pre GFC there were over 150 of the 1100 franchise systems in Australia that had preferential lending packages in place with banks. Post GFC the number is closer to 50, so unless you are buying in to a longstanding franchise system, the likelihood is you need to raise finance under normal small business lending criteria – which is still tough.
For the few franchises with bank packages, you can fund anywhere between 40 – 70 per cent of the total price secured against the assets of that franchise business. The remainder comes from property backed funding or savings. As such these packages can make a big difference to whether you can buy the business.
So whether you can raise bank lending or not – be clear on what you can and can’t do as this sets some important boundaries for your purchase and financing decisions.
OTHER FINANCING METHODS
Leasing, equipment finance and rental are useful alternate financing methods.
When you have the breakdown of the full costs of buying and running the business there are usually certain assets that can be rented or leased.
If your business requires any fitout or special equipment then talk to financiers such as Silverchef, Go Getta or Flexirent – these companies specialise in financing franchise assets. Some have rent, try, buy options as well as traditional lease or rental arrangements. Then there are also a range of vehicle finance specialists who can do standalone leases for business vehicles. Interest costs are often not that much more than bank finance and it can be a lot quicker and easier to get approval and release of the funds.
POSITIONING FOR NEGOTIATIONS WITH THE FRANCHISOR
So you now know the total buy in and set up costs and you know your borrowing capacity and options…but it looks like you might still be short of funds. What else can be done?
Now it is time to explore concessions with the franchisor/vendor.
If a franchisor is going to negotiate with you, first you need to demonstrate to them that you are a desirable candidate and likely to be a successful franchisee. You need to make them want you.
Taking an aggressive approach to the negotiation will not work. Instead, focus on why you are right for this business and the things you will do to grow it. Typically a franchisor will be assessing you for skills, track record, motivation and attitude.
Get on the front foot and prepare a short Business and Marketing Plan. Highlight your skills or track record in this industry or similar roles. Prepare a proper Resume and always come across in a professional and business-like manner. They want people who can largely be self-sufficient in the business, not people who want everything done for them.
SEVEN CREATIVE NEGOTIATION POINTS WITH FRANCHISORS
You want the business, the franchisor wants you, now you have the right environment to test the franchisors flexibility on terms. Within the package of inclusions in every franchise there are some things that can be negotiated on and others that cannot.
Here are some typical inclusions where you may be able to negotiate a reduction or variation to the payment terms:
1 Franchise License fee
Most franchises are for a fixed term of 5 - 10 years. Most franchisors seek to charge this full fee upfront. You may try to reduce the amount or pay some over time, or both. If it is a startup franchise you are likely to see more negotiability on this fee than for an established franchise – but it is definitely worth testing.
2 Training fees
It is fair for a franchisor to recoup their costs of training you and your staff. However some franchisors also make training a profit centre and charge a margin on top of costs. Get a feel for this but either way it is something a franchisor can easily negotiate on as it is a cost controlled by them and often it is a sunk cost as they will be incurring the cost of their trainers and premises anyway even if you do not buy.
3 Marketing funds and other regular costs
Within many Franchise Agreements are a range of smaller ongoing costs payable by a franchisee. They may be for contribution to a Group Marketing Fund, payment for use of systems or for various support services. Whilst you do not pay these upfront they can quickly add to your monthly expenses and if cash is tight in your early trading period it is worth asking if some of these expenses can be deferred.
4 Initial Stock
Like training, this can be an area where franchisors make a profit margin, so try and find out the real costs of stock and pay the cost price not retail price. Franchisors may not tell you the real prices but test them on this as a one-off concession.
5 Turnkey Fitouts
If the franchisor is handling your fitout we call this a ‘turnkey fitout’. Within the total costs of the fitout will usually be the actual cost for materials, equipment, permits and contractors – all of which are reasonable for a franchisor to charge. However there may also be a loading for a Project Management Fee or approval fees. If there is, then this is an area where you may seek a concession. Most franchisors will rightly want to be compensated for their knowledge, connections and time associated with your turnkey fitout but it is an area which may allow some reduction in the context of the overall negotiation.
A franchisor must disclose if it receives rebates from any supplier. The rebates usually relate to stock or fitouts. Ask how much the rebates are and whether they can be applied in reduction of your costs.
7 Landlord fitout contribution
If you are setting up a new site with a fitout, you may be able to negotiate a full or partial contribution to fitout costs by the landlord. Depending on the size of the contribution, the nature of the work and the attitude of the landlord, they may do it for free or they may do it in exchange for you paying a higher rent. Your franchisor may be better placed to handle this for you but it is always worth exploring as it can make a large difference to your upfront outlays. Each franchisor is different and each deal is different but if you really want a particular business and you have presented yourself as a desirable franchise candidate then it is still possible to negotiate and craft a purchase solution that works for all parties. If you are not confident with raising these issues or being able to handle the discussions that will follow, seek professional support.
CEO Consulting specialises in developing, launching and growing franchise systems in Australia and international markets. Services include Strategy, Feasibility, Analysis, Franchise Model Design, Franchise Development, Marketing, Sale & Purchase negotiations, Franchisor and Franchisee Mentoring & Support.
Robert is one of Australia’s leading Franchise experts and an authority on Franchise start ups. Formerly the Australian Head of Franchising for both ANZ Bank and Westpac as well as CEO of RAMS Home Loans.
For further information contact Robert Graham, Managing Director at CEO Consulting: