Planning and research key when investing in a franchise

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Buying a franchise can be quite expensive, especially if you are considering linking up with a franchisor that represents an internationally respected brand which is already a household name. As a result, there are very few entrepreneurs that can afford to completely finance the franchise from their own resources.

Simone Cooper, Head of Franchising and Enterprise Development at Standard Bank, says many franchisors require potential franchisees to make a substantial unencumbered upfront payment as part of the business process. There are two main reasons for this. Firstly, the contribution helps to make franchises more viable, and ensures that the debt is reduced to manageable levels, something that is vital when initial cash flow is slow as the business finds its feet. Secondly, a franchisee investing his or her own money in a store is making a commitment to its success; something that makes a franchisor and the bank comfortable.”

Opening a franchise store is a major event for an entrepreneur. It requires a thorough understanding of what you are required to do, and what the duties of the franchisor are. “At Standard Bank, we advise our potential clients to take all the necessary steps to ensure that their lifetime investment remains a positive event in their lives. This often requires having an attorney or financial advisor that can carefully evaluate the implications of a deal,” says Ms Cooper.

“Because of the importance of this decision, we often allocate a relationship manager who has the expertise to advise franchisees on products and services available and how best they can be utilised.”

A franchisor must approve a prospective franchisee before a bank is approached for financial backing. The bank will require the following personal information from the franchisee:

  • A copy of the franchisee’s identity document, and confirmation of marital status.
  • Personal balance sheet of the franchisee.
  • Statutory registration documents of the company.
  • Proof of the origin of the unencumbered deposit.
  • Background of the franchisee (similar to a CV).

In respect of borrowings for the franchise business, it is important to provide the bank with a breakdown of the funding requirements. Your application for credit facilities must be supported by the following information:

  • Comprehensive business plan and a copy of the franchise agreement of sale.
  • Copy of the lease agreement.
  • Signed financial statements and a 12 month cash flow projection. If the financial statements are older than 6 months, up to date management accounts will be required.
  • Six months bank statements of business trading account.

When borrowing money to finance a franchise it is important to match the duration of the funding to the lifespan of the asset/s. It is common for franchisees to be offered a combination of products that match specific needs. These can include:

  • Property Finance:
    This caters for long-term, flexible finance for the purchase, construction and refurbishment of commercial or industrial property and buildings.
  • Medium-term loans:
    These are most suited to capital expenses involved in franchising and are usually payable in monthly instalments that typically vary from two to seven years.
  • A Business Current Account:
    This indispensable product helps to effectively track money flowing into and out of the business. In addition, an agreed overdraft facility can allow for unexpected expenses to be met as they occur.
  • Vehicle  and asset Finance(VAF):
    This involves specialists from Standard Bank’s VAF finance department helping to assess what funding is needed for vehicles and operational equipment required by the franchise. In addition finance can be arranged to assist with setting up computer networks or even mainframe installations.

“Like any business, a new franchise store needs time to become established. Depending on the area, the number of potential customers and the type of franchise operation, this process can take up to two years. Getting going can therefore demand sacrifices that could include working without a salary when this is required, and making sure that money is retained to finance future growth,” says Ms. Cooper.

Press release by Magna-Carta.

 

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