Your Franchise Money Questions Answered

Funding remains one of the biggest challenges most franchisees face. Here, head of franchising at Standard Bank, Ethel Nyembe, sheds some light on some of the questions you might have surrounding securing and managing your franchise finance.

Your Franchise Money Questions Answered

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 impacts how the transaction would be structured and priced.

How important is it to have a clean 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, which 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.

Related: The F-word

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 creating a reasonable margin of safety, which is essential to have should a business experience financial pressures.

How can a franchisee determine whether or not the franchise they are interested in 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.

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

Ethel Nyembe

Ethel Nyembe

You should notify your lending institution and the franchisor. They will try to co-operate with the franchisee 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.

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 they are 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.

 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 different franchise systems.

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, buyers need to have a strategy of how they increase revenue or decrease costs.

Related: The Best Way to Finance a Franchise Through Investors

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 they are interested in buying into, and has short-listed possible brands, they 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.

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

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.

Ethel Nyembe
About the Author
Ethel Nyembe has had a varied career ranging from Public Relations and Media to Banking. Starting with a media career that included radio and television (presenting, scriptwriting and producing) at the South African Broadcasting Corporation (SABC), she moved on to a position as an Account Executive in newsprint at Business Day. Ethel wrapped up an eleven-year media career as the Deputy General Manager for Sales and Marketing for Sunday Times in 2004. 2004 marked Ethel’s introduction to a career in banking, where she began a six-year tenure at First National Bank. In the first quarter of 2010, she joined Standard Bank, where she is currently the Head of Small Enterprise, Retail Banking, South Africa. Ethel is passionate about the entrepreneurial spirit South Africa holds, and has served on several business boards, as well as on the boards of co-operatives in the Johannesburg city centre and Economic forums in Gauteng. She has a keen interest in sport and the social upliftment of the community.

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