Securing Finance Is Challenging

Buying into the world of franchising can seem like a safer bet in the current economic climate than striking out on your own. But, unless you’re flush with cash, you’re going to need financing – and banks are being more careful than ever when it comes to lending money.

1. Own your business plan

Absa Business Bank head: Wholesale, Retail and Franchise James Noble, says that a common challenge is that franchisees don’t necessarily have the business acumen to put together business plans as part of their funding proposals, so they turn to experts to draw them up. “There’s absolutely nothing wrong with that, but we find that once we start asking questions about elements of the plan or the projections, they don’t really understand it. They’ve had it prepared purely for the purposes of attempting to secure finance.”

2. Understand business finance

“The reason so many businesses fail is because the operators have great ideas, but don’t possess the skills to understand the financial management side of the business,” says Noble. He believes that there is a general lack of those sorts of financial skills in the small and medium enterprise world because people aren’t taught basic financial skills. “Franchising associations, banks and government should be more proactive in providing platforms where prospective business owners can be upskilled.”

3. Get your projections right

Eric Parker, partner at Franchising Plus, says that a good franchise will give an organised franchisee a return on their investment in three to three-and-a-half years. “That’s your check – do the figures and make sure you will make your money back,” he says. “That timeframe is also important because most franchise agreements state that you have to remodel your franchise after three to five years, so you need to ensure that you’re in a financial position to honour that.”

4. Think ahead

If you’re financed for one franchise, it’s important to think ahead – are you looking to open more stores? Noble says that the bank considers the value of the brand when it comes to expansion. “We take into account the value of the existing store and can make a determination on whether a second store could be geared higher than 50 per cent, but with cross-surety from the existing one to help mitigate risk.”

5. Back the right horse

As with any investment, Parker says it is vital to look at the franchise and throughly do your homework – especially in terms of how it’s going to fit into the ecosystem of a much-changed world. “Consider what’s going to happen when we start beating COVID-19 and come back from lockdown. Even then there will be fewer people working from offices and less traffic on the roads. Shopping patterns and habits will be different,” he says. “With so many shopping centres built around business hubs, they’re going to have to find new ways to function. If your franchise is going to depend on business traffic or proximity to offices, you need to consider the model and your location.”

6. Know what you’re financing 

Noble says that it’s important to interrogate the setup costs when looking to establish a franchise so you understand where your money is going. “You need to know what you’re paying for. Some franchisors earn rebates from the suppliers to their franchisees – even for equipment required to set up the business – so it’s important to look around and make sure the start-up and operating costs aren’t overpriced,” he says.

7. Have realistic expectations 

“A lot of franchisees come from a corporate background and are used to a fixed salary. They start a franchise and expect to receive the same income every month,” says Noble. “The business may not be able to afford that until the breakeven point, so franchisees may have to make some lifestyle changes to accommodate a lower income.” He advises stress-testing a cashflow projection – reduce the turnover by 20 per cent and increase the expenses by 10–15 per cent to see if the numbers are still viable.