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.

Related posts:

1. Financing a Franchise – Part 2 of 3
2. Financing a Franchise – Part 1 of 3
3. Financing a Franchise