A lot. That’s our description these days about what’s happening in franchise financing. Canada has hundreds of franchising opportunities that abound. It’s just sorting through the right opportunity and matching business loan/loans to fulfill that entrepreneurial dream.
Let’s sift through some of those challenges, allowing the franchisee to realize on the business ownership dream.
Many clients we talk to seem to think that a tougher economy makes it tougher to get business loans for franchise financing in Canada. We don’t necessarily feel that’s the case, if, and it’s a big if, you have done your homework and have a game plan.
That game plan includes planning and ensuring you have the expertise and sources to get your transaction completed. And all of those financial needs, in many cases, need to be financed differently. Those needs might include the actual franchise fee itself, financial planning that covers off your royalty fee, as well as inventory, working capital and leaseholds and equipment.
Franchise sizes vary significantly in Canada. Many are Canadian organizations, while others are units out of a U.S. parent who has a direct organization in Canada or in other cases works through a Master franchisor who has purchased a territory – Canada! (Talk about a big territory!)
Your personal resources play a significant part in your overall franchise business loan financing plan. It’s important to create a personal balance sheet that allows you get a sense of your overall liquidity. Simply speaking, what you have and what you owe.
The importance of that document can be overstated. Both franchisor and your franchising lender want to get a sense of who they are dealing with, both from a financial and business experience point of view. And by the way, your personal credit history has a huge impact on your ability to both acquire the franchise, but more so, get it financed!
There are some interesting trends happening in the franchise industry in Canada. Many entrepreneurs are actually increasing their chances of success (or failure) by trying to acquire multiple units at the same time. We generally caution clients who are looking at multiple unit deals to ensure they have the financial bench strength to go through the whole process. It’s absolutely critical to also ensure they have legally structured their total opportunity to ensure the failure of one unit doesn’t take down their entire empire!
The other key trend we see a lot of today is that multiple concepts seem to be popular. This has the owner juggling multiple brands, typically in the QSR (quick service restaurant) industry. So if they didn’t think one restaurant was enough of a challenge, how about two?
One big, no scratch that, huge mistake that franchisees make, and we see it often, is the financing of a new store out of the working capital proceeds of their other store. Inevitably, Murphy’s Law sets in and the resources and financial reputation of both entities are strained to the point of collapse. Our advice?Consider financing each unit separately on its own merits with some additional new equity.
We can’t begin to list all the risks and rewards of a franchise opportunity in Canada. But we can ensure franchisees that careful financial planning, with expertise, is critical. Minimize the risk, maximize the reward.