Stuart Walsh, managing director of Franchise Finance, shows you how to be successful in obtaining finance
Choosing the right franchise for you is a major decision. This decision making process will involve a significant amount of time, thought and in-depth research.
When you decide on your chosen franchise, the next step is to secure the right amount and type of finance.
Total investment
Prior to starting your search for finance, you need to understand the total investment required for your franchise, how much you can contribute from your own resources and how much finance you require.
At Franchise Finance, we’ve spoken to many would-be franchisees who, when asked what the total investment was, replied only with the cost of the franchise fee. It is important to be aware that the total investment is the sum of all costs associated with the set up of the franchise, which includes VAT and working capital.
The amount of working capital required in the business is one of the most critical aspects of your financial planning and is often the number that can be miscalculated by prospective franchisees. If you don’t have enough working capital, you’re likely to run out of cash and without cash you go out of business.
Business plan
In order to identify the amount of working capital and ultimately the total investment, you need to prepare a comprehensive business plan.
The business plan should cover three main focus points. Firstly, it should set out the investment you need to make and the returns you expect the business to deliver. Secondly, the plan will become your application for finance. Thirdly, you should use your plan to monitor your performance and manage your business on an ongoing basis.
Getting the business plan right is crucial if you’re going to be successful in raising finance to start and grow your franchise business. We often speak to people who have approached a lender directly and have been declined for finance, not because they’re not creditworthy, but because their business plan doesn’t meet the lender’s requirements.
As an application for finance, the business plan needs to include all the information that’s required by the person who is evaluating your proposal on behalf of the lending institution.
It should start with an executive summary, which should give a concise overview of the business opportunity and funding requirement. It needs to identify who the owners of the business will be and provide their personal information, such as name, address, dates of birth and a copy of their CVs.
Any lender will perform a credit search on the business owners and require this information to be able to do this. You also need to set out your personal assets (what you own) and liabilities (what you owe).
The lender will want to understand your household expenditure and what income you have to cover this. It will want to ensure you can afford to pay your bills while you’re growing the business. If your income is coming from the new business, make sure this is included within the financial projections.
The business plan should include information about the franchisor, the business model itself, how the franchisor will train, support and develop you, plus the marketing activity. It should also set out your SMART business objectives (specific, measurable, achievable, realistic and timely).
Financial forecasts
This brings me to the financial forecasts. You need to include profit and loss projections, a separate cash flow forecast and a forecast end of year balance sheet. I would suggest these cover at least three years.
The profit and loss projections will show the trading activity for the business, the sales, costs and how much profit you expect to make. The cash flow forecast will set out the incoming investment from you and any other finance, the set-up costs going out, the money coming in and out through the trading activity and VAT. Put simply, it’s a forecast of what your bank account will look like at the end of each month.
Remember, these are projections of what you predict will happen. In real life, it’s difficult to predict.
The closing balance on the cash flow each month needs to be sufficient to allow for fluctuations in the timings of when money is received and paid out and, additionally, for the possibility that you may not achieve the sales levels expected.
This is where you set the amount of working capital you need. It’s important to consider if you require an overdraft facility.
This uncertainty is part of the risk of setting up any business, but with a franchise you de-risk this because the franchisor has, through its pilot operation or existing franchisees, already tested and proven the theory.
This is why banks love lending to franchises, because they are proven business concepts. If you can reference the financial performance of existing franchisees as the basis of your financial assumptions in your business plan, this significantly enhances the credibility of your proposal, thus maximising the likelihood of getting your finance application approved.
Guidance is beneficial
Depending on your skill set, writing a business plan to arrange the finance you need may be achievable. However, for a lot of would-be franchisees some guidance is beneficial.
If this is the case for you, get in touch with the friendly Franchise Finance team. We would be delighted to assist you.
