Got a Financing Question?

One of the biggest challenges most franchisees face is securing funding and managing their finances. Head of Franchising at Standard Bank, Thabiso Ramasike, provides answers for some of the questions franchisees have surrounding finance.

Got a Financing Question?

Q: What are some of the most important criteria a bank looks at when a franchisee applies for funding to purchase a franchise?

We see the role of the bank, franchisor and franchisee as a ‘tripartite alliance’. Therefore, we work with the franchisor and prospective franchisee to identify and manage all factors that could prove to be an obstacle to securing funding for the business, and more importantly that could impede long-term profitability and sustainability.

Standard Bank takes a holistic in-depth look at various factors that help determine whether the business venture will be successful. For instance we will consider whether the applicant is a first-time franchisee or looking to buy a second store, or is already a highly established franchisee who requires an additional store.

This gives an indication of the franchisee’s understanding of the proposed franchising model and their own track record, which indicates the potential for them to make a success of the acquisition. Another important factor to consider would be the level of financial contribution that the prospective franchisee would be making to the business. A good credit record and a sound business plan are both essential when a prospective franchisee is raising funding.

Q: To what extent does the track record of the franchisor play a role in the funding application?

The quality of the brand is everything when it comes to funding franchises. The mere mention of the brand translates into its track record and the quality of management. The quality of the brand does impact on how the transaction would be structured and priced.

Q: How important is it to have a clear credit history?

A clean credit history is critical when applying for any credit. It tells the prospective financier that the applicant has a good track record and that tells the financier something about the applicant’s integrity. Furthermore, this also indicates that the applicant has sound financial management skills, and takes his responsibility to repay debt seriously.

Q: How important is it for a franchisee to invest some of their own money into the franchise?

The level of contribution by the franchisee is a sound indication of the owner’s commitment. Unencumbered funds help with cash flow projections and reduce gearing levels for the business. It also provides comfort to the financier and the franchisor in respect of creating a reasonable margin of safety, which is essential to have in case a business experiences financial pressures.

Q: Does a multi-unit franchise owner stand a better chance of securing funding than a first timer?

A multi-unit franchise owner certainly brings more experience to the table, so to speak. A typical multiple franchise owner has a sound track record, already has operating systems in place, has a management team with the requisite track record and understanding of how to run the business.

They also have a much stronger relationship with the franchisor and have become much more capable of reading and responding to the market over time. This stronger financial background and muscle will significantly improve their chances of succeeding.

This does not infer that first-time franchise owners have lesser chances of success. First-time franchisees must take advantage of the management, training, marketing and software support available to them as part of the franchise agreement and arrangement.

Q: How can a franchisee determine whether or not the franchise outlet they are interested in purchasing is a good investment?

Granted, there are no guarantees or assurances in business. However, a hopeful franchisee can increase the probability of success by doing thorough research into the brands he believes he has an appetite for, scrutinising their track record, and interrogating future plans.

The more established brands are naturally more expensive to buy into, but their proven track record increases the franchisee’s chances of success. Brands that have been around for longer have proven sustainable and successful over and over again, even in a recessionary environment.

A franchisee could approach franchise associations, independent franchise specialists and financial institutions that have been involved in the franchise industry for an unbiased and independent review of the brands they are interested in.

Q: What happens if the franchise isn’t making enough money to cover the loan repayments?

We cooperate with the franchisor and franchisee in order to assist the business and agree on joint solutions in assisting the business to move forward. Typical intervention measures could include a moratorium on capital repayments, royalty breaks as well as debt refinancing and restructuring.

Q: How can a franchisee determine whether or not they can afford a franchise?

Again, the franchisee has to do proper and thorough homework about the nature of the franchise he is buying into. Do your homework thoroughly in selecting the franchise of choice and consider affordability. Work out if you have enough financial resources to pay the upfront and ongoing fees to sustain the business until it breaks even.

Take into account management fees and interest rates of the loan. Get financial reports and projections from franchisees. Talk to other franchisees within the brand that you are considering. This will give you a realistic assessment of how much money you need. Do not be afraid to ask questions relating to the profitable viability of the franchise.

The potential franchisee should data mine all the monthly commitments that would need to come into play — royalties, wages and running costs. Understand the appetite for risk.

Q: What are some of the most lucrative franchising sectors in South Africa?

It is very difficult to comment on what is and what is not lucrative. Standard Bank foresees much activity in five key sectors, namely, fuel, retail (mainly food), restaurants, fast-food and telecommunications, in no particular order in 2011.

Q: Is there a way to determine the profitability of a franchise?

A business plan is a crucial starting point in gauging the profitability of a franchise. Various franchisees have set models for making profitability projections. Site and location come into play. It is largely about engaging with the franchisor and finding out what goes into running a profitable franchise outlet, which will vary among all the different franchise systems out there.

Simply put though, all projections need to indicate a profitable enterprise. If one is buying an existing business, the business needs to be profitable at the time of purchase. Alternatively, the buyer needs to have a strategy of how he will increase revenue or decrease costs.

Q: What should a franchisee do first? Secure financing for a franchise or continue with the application process with the franchisor?

Once the franchisee has decided which franchise system he is interested in buying into, and has short-listed possible brands, he should apply to those brands. A potential franchisee may apply with the franchisor and the bank concurrently. However, approval from the financial institution and from the franchisor is always subject to the other. l

Q:What are some of the things that could harm an applicant’s chances of receiving funding?

Among the factors that could impact negatively on an application for finance include an evident  lack of understanding of the fundamental principles of franchising and the particular brand they are buying into, and not being able to make an upfront owner-contribution into the business.

The bank looks at all the components of the operation in consultation with the franchisor and prospective franchisee. If there are ‘red flags’ Standard Bank would engage with both parties to determine how any risk or impediment to business success could be managed or eliminated.

Franchise Zone
About the Author
Franchise Zone is published by Entrepreneur Media SA. It offers advice and franchising opportunities in South Africa.

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