Buying a franchise business in Canada. Talk about a commitment that requires a combination of logic, perhaps some luck, and some common sense around the type can cost of franchising loans.
Franchising is so popular today that opportunities are available at every price point, and with that comes varying costs – from a few thousand dollars of investment required… all the way up to Million dollars ++.
As consumers we certainly don’t buy thing we can’t afford, and that logic should clearly be carried over when it comes to a franchise purchase. Notwithstanding the fact that franchising loans and financing are available to those that qualify it becomes a question of risk, return on capital, and your ability to make an equity contribution to the business venture.
Having both a realistic business plan that properly shows cash outflows and inflows at the start of the business is critical. And quite frankly thats the same methodology and logic you would use to acquire any other business, franchise or not! Being able to demonstrate a realistic profit and cash flow to your lender is always critical.
What are then some of the key factors that come into the financial aspect of the purchase? (Were going to assume you are over the hump when it comes to all the emotional aspects!)
Every busines purchaser assesses the cost of buying a franchise business when it comes to return on your initial investment. We constantly hear that an investment in the franchise industry requires a major investment of time when it comes to ‘ who’s minding the store . So don’t forget to factor in both the cost of the franchise as well as the amount of time and expertise you have to invest to make the business successful and grow.
Part of the franchising cost is of course the initial franchise fee. In general that fee is not financeable, and is often shown as ‘ Goodwill ‘ on your balance sheet. So more often than not we advise clients that they need to cover off the franchise initial fee as part of their initial equity investment into the business.
Franchise royalties vary in Canada – they typically seem to be in the 6-8% range and need to be carefully factored into your busines plan and cash flows as they significantly impact cash flow and profits.
Timing. There isn’t a day when we don’t speak to a potential franchisee that needs to have his or her financing arranged – yesterday! You need to be in a position to allow for a reasonable amount of time to put your whole financing plan and package/strategy together. Working in panic mode with a lender basically … never works!
Franchisees address the opportunity to own their own business in a number of ways. Some actually end up paying cash, some choose a partner, and larger opportunities actually have the ability to acquire an equity investor. Is any one of these better than the other? Not really, although we would add that paying full cash for your purchase certainly depletes personal equity and net worth. By incorporating your business and financing it properly you are clearly addressing the issue of matching risk and liability properly.
Seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can assist you with a proper strategy for the cost and type of franchising loans and finance you need to be successful.