Financial Facts you Need to Know About Franchises

Something to bear in mind when crunching your numbers: According to The South African Franchise Market survey released by FASA

Financial Facts you Need to Know About Franchises

According to The South African Franchise Market survey released by FASA (2014), the times taken for new franchises to break even are:

  • Up to six months 43%
  • Seven to twelve months 28%
  • More than a year 17%.

It is important to understand why it is necessary to have sufficient unencumbered funds so that the business isn’t geared too high and you don’t end up drowning before you reach break-even.

Related: The F-word

Sufficient working capital while your business reaches break-even is also critical to start-up success. The 11 sectors listed below reflect the working capital required by franchisors when buying a franchise.

  1. B2B – R400 487
  2. Automotive – R363 250
  3. Fast food and restaurants – R224 250
  4. Construction and related – R201 250
  5. Retailing – R186 083
  6. Building, office and home services – R152 957
  7. Health, beauty and fitness – R152 000
  8. Real estate – R100 000
  9. Childcare, education and training – R96 750
  10. Leisure and entertainment – R65 250
  11. Personal services – R54 032

Understand different routes for finance

On the road to owning your own franchise, one of the biggest looming obstacles to making it happen is finance. If you think it will be easier than financing a start-up simply because it’s a franchise with a proven concept, you’re in for a surprise. So how do you drum up the dosh?

The franchisor

Once you’ve been approved by the franchisor, ask them for a list of preferred lenders and details of lender expectations. If the franchisor has been around for some time, chances are they’ve developed relationships with certain finance institutions.

While industry experience and ability to run a business play a large part in successful finance, lenders tend to loosen the purse strings more readily for an applicant who has been given the green light from a reputable franchisor.

Some franchisors are also able to provide some of the finance themselves or through partnerships with lenders. Taste Holdings, for example, has partnered with Nedbank and Brimstone Investment to create a funding model that helps prospective Fish & Chip Co franchisees and Zebro’s franchisees to gain finance.

The bank

If you’re going to approach a bank for finance there are a few things you’ll need to consider before you do. Banks like hard numbers. As always, solid business plans with strong financials and a great credit history are essential to success.

Industry experience or a related history is also a big plus, but perhaps most importantly, the lender is going to be focused on how strong the organisation is and what kind of support it can give its franchisees.

Related: The Best Way to Finance a Franchise Through Investors

Provide a detailed explanation of how you plan to save money on equipment and supply arrangements, your research on buying versus leasing, your plan for hiring and managing employees, for finding real estate and so on. It will show the lender you’re thinking about this.

Top tip: If the franchisor hasn’t been in business for long, be prepared to sell the lenders on it with strong numbers.

Tapping retirement funds

Some consider it risky to tap retirement assets for a new business venture, but others see it as a natural fit. The question you need to ask is whether you’re willing to take the risk and build equity in something you’re managing rather than leaving it up to others.

If you choose to go that route, it has the advantage of not having any debt to repay.

As for the risks, it may not be that different from the risks associated with loans that call for personal assets as collateral, provided you’re young enough to shake it off and get saving again.

If you’re reaching retirement though, assess your decision carefully. With enough careful planning and due diligence, you can mitigate the dangers, but any business venture is a risk.

Cracking the nest egg

Even if you take out a loan, you can still use your personal savings as a down payment or a cushion until the profits get rolling.

Bear in mind that most franchises require a minimum 50% unencumbered capital, so the more money you have saved up, the more can go towards working capital or emergency funds.

Related: Royalties Forever?

The other F-word

We’re talking about friends, family and fools. But just because you’re on familiar terms doesn’t mean you can skip the important business plan process, expect to borrow money with no financial reward for the lenders, or run the risk of ruining relationships if your venture flops.

Key to remember: Franchises require high unencumbered capital to avoid high gearing. In the event that your lender needs their money back sooner than expected, will you and your franchise be able to survive?

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