By Chris Ryan F. Fin.

So……… you want to buy a franchise? Why?

You may have many reasons, but let me suggest that your primary motivation for buying a franchise should be a desire to make money. Or more specifically, to make an adequate profit sufficient to fund your life’s expenses. This could be -:

1. putting food on the table for your family,
2. providing a roof over their heads,
3. paying your mortgage,
4. funding your household costs like rates, electricity, motor vehicle & more,
5. providing welfare and education for your family and
6. financing your sport and recreation needs.

To start off, you need to identify a business that can accomplish all the above, and just as importantly -:

1. fund the costs of running the business,
2. service any borrowings necessary to purchase the business, and
3. provide sufficient return on the cost of the investment (ROI) to justify your purchase of the business.

What If You Get It Wrong

Before you buy a business on finance, you need to have an honest understanding of your household costs to keep the home fires burning.

Why? Get them wrong and you face these alternatives -:

• Starvation… result: your business fails because you starved to death.
• Family starves… result: Before starving, they kill you because you are a poor provider.
• Have to sell the family home… result: family leaves, you get depressed and you might as well have had the family kill you.
• Can’t pay the school fees, ballet lessons, etc. … result: again, death is lookin’ good.

The most probable alternative however is:

You will be reluctant to withhold funds from your family or yourself. Therefore, you will starve your business of working capital & stock. As this position gets worse, opportunities reduce and your business fails.

Result: You will have lost a lot of money as you were required to sell the business for much less than the purchase cost. Or worst of all, you don’t have a business to sell.

So two things -:

1. Get the household expenses right, and
2. Understand the issues of financing the business, such as -:
   1. Fees,
   2. Interest Rates,
   3. Security,
   4. Term of Borrowing,
   5. Profit Projection and
   6. Working Capital.

a. Fees

Banks will charge approval fees. This may vary between 0.6% to 1.2% of the sum borrowed. The primary commercial finance lenders will be the four majors (ANZ, CBA, NAB and WBC).

b. Interest Rates

In some cases, purchasers may have sufficient equity in residential land or home to be able to borrow for a business purchase on home loan rates. However, it is a monetary regulator directive for banks to seek commercial borrowing rates. This could be 2.0% to 4.0% above residential borrowing rates.

So the better prepared you are with your business plan and security options, the better result you may achieve. Franchises often benefit from interest rate concessions due to the relationship between the lender and the proven successful history of the franchise operation.

c. Security

You may have already considered the problem – “Will the equity in my home be enough to provide the bank with the necessary security?”

Whilst banks recognise the business you intend to purchase “has value”, the difficulty you face is convincing the lender to utilise that value towards the security needs of the borrowing proposal.

In some instances this may be possible but generally this is only with recognised commercial lenders. Again, franchise businesses provide the purchaser with an advantage.

With a “Franchise Business”, a lender may have a “Franchise Policy” which recognises the business as having a capacity to provide a percentage of the purchase price towards securing the borrowing need. This percentage may range from 40% to 70% depending on the franchise and the lending bank.

d. Term of Borrowing

Normally, the business will occupy leased premises. And in the case of a franchise, the head franchisor will have secured the lease for the franchise group and you will be offered a sub-lease. An important issue to remember is that the term of your borrowing could be linked directly to the remaining term of the lease.

This issue applies to both stand-alone businesses and franchises, albeit this is often relaxed with franchises. This is because landlords will generally favour a franchisor over a stand-alone operator.

There are sound reasons for this including -:

• The business may be reliant on the site of the premises to access the desired market segment. In the event the business lease expires and renewal is not available, the business may need to close and re-establish elsewhere. Cost of re-establishment on top of servicing remnant loan payments may create overwhelming strains on profitability and working capital.
• No suitable site may be available necessitating winding-up of the business, and with a remaining debt still to be serviced there will be no income stream to provide such servicing.
• You may be seen as a captive tenant at the expiration of the lease and the renewal terms offered bear no relationship to the expiring lease thus placing extreme stress on what was originally seen as a viable operation.

The moral of the story is to establish as many of the terms (rules of the game) for the period you will have a borrowing commitment.

e. Profit Projection

As discussed, this is a very important section of the business purchase. This is based on the vendor’s historical data extrapolated to take out his costs and include your costs.

The Banker will need to see:

1. your assessment of expected profitability,
2. how it will service your existing debt obligations, as well as
3. those obligations you would propose to take on as a result of the business purchase.

Also, don’t forget those home-based costs we discussed earlier.

And in addition, the banker will also need to see that there is a reasonable margin in the profit to allow for negative movement in the economy.

With regard to financial data, franchise businesses have some advantage over stand-alone businesses in that they have financial systems in place to ensure ratios such as cost of goods, rental, etc. are being achieved in accordance with other franchise members’ ratios.

This will provide an expectation upon franchise members to maintain a level of record keeping sufficient to enable access to bank borrowings. And not only that, you ensure for yourself that you can promote the business correctly for sale at a later date, if and when you decide to move on.

f. Working Capital

Working capital adequacy can only be tested by one means – by compilation of a Cash Flow Forecast. This is usually completed in conjunction with the Profit Projection (note: they are both very different from each other).

Whilst the Profit Projection is “Tax and Cost-In” based, the Cash Flow Forecast is “Time and Cost” based. To clarify this a bit, Interest costs go in as an expense on the Profit and Loss, whilst Principal plus Interest payments go to the Cash Flow Forecast.

And Finally…

If you’re not confident in compiling the data described above, I suggest you utilise the services of a professional Commercial Finance Broker or the services of your Accountant. In many cases, you’ll only have one chance to get it right.

And remember the rule, “Those who act as a solicitor for themselves have a fool for a client.” … so keep your solicitor, and for that matter your accountant as friends.

Chris Ryan F. Fin.
ryanmortgage1@optusnet.com.au

Chris Ryan is a Finance Broker specialising in Commercial Lending. He is a Director of Ryan Mortgage & Finance Pty Ltd and is a Fellow of the Financial Services Institute of Australia. Chris Ryan has 33 years experience in the Banking Industry principally engaged as a commercial lender and has operated his own Finance Broking practice for 10 years.

By Chris Ryan F. Fin.

This is the third and final part of my article series on financing a franchise. If you haven’t done so, please read Part 1 and Part 2 before continuing on below.

As discussed last week, the issues of financing a business can include:

1. Fees,
2. Interest Rates,
3. Security,
4. Term of Borrowing,
5. Profit Projection and
6. Working Capital.

This week, aside from discussing profit projection and working capital, I’m going to conclude with some wisdom on doing business in general.

e. Profit Projection

As discussed, this is a very important section of the business purchase. This is based on the vendor’s historical data extrapolated to take out his costs and include your costs.

The Banker will need to see:

1. your assessment of expected profitability,
2. how it will service your existing debt obligations, as well as
3. those obligations you would propose to take on as a result of the business purchase.

Also, don’t forget those home-based costs we discussed earlier in Part 1.

And in addition, the banker will also need to see that there is a reasonable margin in the profit to allow for negative movement in the economy.

With regard to financial data, franchise businesses have some advantage over stand-alone businesses in that they have financial systems in place to ensure ratios such as cost of goods, rental, etc. are being achieved in accordance with other franchise members’ ratios.

This will provide an expectation upon franchise members to maintain a level of record keeping sufficient to enable access to bank borrowings. And not only that, you ensure for yourself that you can promote the business correctly for sale at a later date, if and when you decide to move on.

f. Working Capital

Working capital adequacy can only be tested by one means – by compilation of a Cash Flow Forecast. This is usually completed in conjunction with the Profit Projection (note: they are both very different from each other).

Whilst the Profit Projection is “Tax and Cost-In” based, the Cash Flow Forecast is “Time and Cost” based. To clarify this a bit, Interest costs go in as an expense on the Profit and Loss, whilst Principal plus Interest payments go to the Cash Flow Forecast.

And Finally…

If you’re not confident in compiling the data described above, I suggest you utilise the services of a professional Commercial Finance Broker or the services of your Accountant. In many cases, you’ll only have one chance to get it right.

And remember the rule, “Those who act as a solicitor for themselves have a fool for a client.” … so keep your solicitor, and for that matter your accountant as friends.

Chris Ryan F. Fin.
ryanmortgage1@optusnet.com.au

Chris Ryan is a Finance Broker specialising in Commercial Lending. He is a Director of Ryan Mortgage & Finance Pty Ltd and is a Fellow of the Financial Services Institute of Australia. Chris Ryan has 33 years experience in the Banking Industry principally engaged as a commercial lender and has operated his own Finance Broking practice for 10 years.

By Chris Ryan F. Fin.

This is the second part of my article series on financing a franchise. Please read Part 1 before continuing on below.

As discussed last week, the issues of financing a business can include:

1. Fees,
2. Interest Rates,
3. Security,
4. Term of Borrowing,
5. Profit Projection and
6. Working Capital.

This week, I’m going to discuss fees, interest rates, security and term of borrowing.

a. Fees

Banks will charge approval fees. This may vary between 0.6% to 1.2% of the sum borrowed. The primary commercial finance lenders will be the four majors (ANZ, CBA, NAB and WBC).

b. Interest Rates

In some cases, purchasers may have sufficient equity in residential land or home to be able to borrow for a business purchase on home loan rates. However, it is a monetary regulator directive for banks to seek commercial borrowing rates. This could be 2.0% to 4.0% above residential borrowing rates.

So the better prepared you are with your business plan and security options, the better result you may achieve. Franchises often benefit from interest rate concessions due to the relationship between the lender and the proven successful history of the franchise operation.

c. Security

You may have already considered the problem – “Will the equity in my home be enough to provide the bank with the necessary security?”

Whilst banks recognise the business you intend to purchase “has value”, the difficulty you face is convincing the lender to utilise that value towards the security needs of the borrowing proposal.

In some instances this may be possible but generally this is only with recognised commercial lenders. Again, franchise businesses provide the purchaser with an advantage.

With a “Franchise Business”, a lender may have a “Franchise Policy” which recognises the business as having a capacity to provide a percentage of the purchase price towards securing the borrowing need. This percentage may range from 40% to 70% depending on the franchise and the lending bank.

d. Term of Borrowing

Normally, the business will occupy leased premises. And in the case of a franchise, the head franchisor will have secured the lease for the franchise group and you will be offered a sub-lease. An important issue to remember is that the term of your borrowing could be linked directly to the remaining term of the lease.

This issue applies to both stand-alone businesses and franchises, albeit this is often relaxed with franchises. This is because landlords will generally favour a franchisor over a stand-alone operator.

There are sound reasons for this including -:

• The business may be reliant on the site of the premises to access the desired market segment. In the event the business lease expires and renewal is not available, the business may need to close and re-establish elsewhere. Cost of re-establishment on top of servicing remnant loan payments may create overwhelming strains on profitability and working capital.
• No suitable site may be available necessitating winding-up of the business, and with a remaining debt still to be serviced there will be no income stream to provide such servicing.
• You may be seen as a captive tenant at the expiration of the lease and the renewal terms offered bear no relationship to the expiring lease thus placing extreme stress on what was originally seen as a viable operation.

The moral of the story is to establish as many of the terms (rules of the game) for the period you will have a borrowing commitment.

This concludes part two. Next week will be the finale in my article series on financing a franchise – so stay tuned!

Chris Ryan F. Fin.
ryanmortgage1@optusnet.com.au

Chris Ryan is a Finance Broker specialising in Commercial Lending. He is a Director of Ryan Mortgage & Finance Pty Ltd and is a Fellow of the Financial Services Institute of Australia. Chris Ryan has 33 years experience in the Banking Industry principally engaged as a commercial lender and has operated his own Finance Broking practice for 10 years.

By Chris Ryan F. Fin.

So……… you want to buy a franchise? Why?

You may have many reasons, but let me suggest that your primary motivation for buying a franchise should be a desire to make money. Or more specifically, to make an adequate profit sufficient to fund your life’s expenses. This could be -:

1. putting food on the table for your family,
2. providing a roof over their heads,
3. paying your mortgage,
4. funding your household costs like rates, electricity, motor vehicle & more,
5. providing welfare and education for your family and
6. financing your sport and recreation needs.

To start off, you need to identify a business that can accomplish all the above, and just as importantly -:

1. fund the costs of running the business,
2. service any borrowings necessary to purchase the business, and
3. provide sufficient return on the cost of the investment (ROI) to justify your purchase of the business.

What If You Get It Wrong

Before you buy a business on finance, you need to have an honest understanding of your household costs to keep the home fires burning.

Why? Get them wrong and you face these alternatives -:

• Starvation… result: your business fails because you starved to death.
• Family starves… result: Before starving, they kill you because you are a poor provider.
• Have to sell the family home… result: family leaves, you get depressed and you might as well have had the family kill you.
• Can’t pay the school fees, ballet lessons, etc. … result: again, death is lookin’ good.

The most probable alternative however is:

You will be reluctant to withhold funds from your family or yourself. Therefore, you will starve your business of working capital & stock. As this position gets worse, opportunities reduce and your business fails.

Result: You will have lost a lot of money as you were required to sell the business for much less than the purchase cost. Or worst of all, you don’t have a business to sell.

So two things -:

1. Get the household expenses right, and
2. Understand the issues of financing the business, such as -:
1. Fees,
2. Interest Rates,
3. Security,
4. Term of Borrowing,
5. Profit Projection and
6. Working Capital.

This concludes part one. Some of these issues will be discussed next week in my article series on financing a franchise – so stay tuned!

Chris Ryan F. Fin.
ryanmortgage1@optusnet.com.au

Chris Ryan is a Finance Broker specialising in Commercial Lending. He is a Director of Ryan Mortgage & Finance Pty Ltd and is a Fellow of the Financial Services Institute of Australia. Chris Ryan has 33 years experience in the Banking Industry principally engaged as a commercial lender and has operated his own Finance Broking practice for 10 years.