One of the barriers preventing some people from starting up their own business, or getting into a franchise is cost. This is especially true with regards to the restaurant industry. New owners are required to invest in expensive kitchen equipment, dining room tables & chairs, décor, modification or construction costs, inventory and so on. All of these things do not come cheap and the capitol required can be overwhelming for many. This particular area is where franchising offers a greater benefit than opening a business independently. The franchisor already has an established supply chain that you can capitalize on, typically saving you time and ensuring you receive the best possible price. But perhaps most important of all, the franchisor will be able to help you devise a strategy on how to best approach the bank.
The first step is to evaluate your personal financial situation. Being self-aware of your current situation and what you actually need from the bank is very important. If you don’t know what you need from the bank, how can you expect the bank to know? A few quick questions to help you get started are:
By answering these three simple questions, you are already on your way to better understanding your situation. Every franchise is different in regards to the overall investment required in order to become a franchisee. Knowing what you can afford and what you cannot in your research phase, will save you a lot of time and heartache in the long run. It can be very discouraging to have your heart set on a particular franchise, only to later find out that the overall investment is way out of your price range. Keep in mind that the total amount of unencumbered equity required to invest in a franchise is usually between 30%-50%. Be proactive and know what you can afford ahead of time to save yourself from the disappointment later on.
Lauren d’Entremont, editor and author at the Canadian Franchise Association, summarizes this in her Franchise Matters series.
“A prospective franchisee should have a complete picture of their financial situation at the ready, including a personal net worth statement, personal tax assessments for the most recent two years, and their credit rating, in order to find a franchise that fits financially.”
Luckily, you don’t have to do this alone. Although it is important to have a general idea of you can afford, the franchisor should help guide you in navigating the financial qualifications. As a part of the C-Lovers’ application process, we have you fill out a Confidential Qualification Form. This form provides a summary of your financial situation and outlines all of the necessary information for you and the franchisor. We then review the form with you and provide advice tailored to your unique circumstances.
Regardless of your situation however, you will need to create a business plan for when you approach the bank. C-Lovers will provide you with some templates that you can use to help put your plan together. A good business plan will help you (and the bank) determine what financing is required and how it will be paid back. Ultimately the bank wants to ensure that you’re prepared and capable of operating the business you are presenting to them. Show them that you’ve thought of every possible scenario (best case, most likely and worst case) and prove that the business is viable in each of them. Consult with C-Lovers and we will help guide you in putting together a complete and thorough business plan.
There are plenty of resources online to help you start to assess your own situation and put together a business plan. Articles like Finance Your Franchise on Entrepreneur.com, offer practical tips and links to other helpful resources.
Finally, when putting together your business plan, don’t forget to account for the ‘soft costs.’ Lauren d’Entremont outlines these as:
“financing costs (interest on loans); working capital to use until the business breaks even; security deposits (paid to utility companies, for example); professional fees to retain lawyers, accountants, and such; and any required licenses, permits, insurance and training costs.”
People tend to focus on the obvious ‘hard costs’ such as the location and equipment but they forget about these soft costs. Do your best to account for all costs and then leave a buffer. No matter how meticulous and detailed your plan is, unexpected costs will come up. It’s always better to plan ahead so that you are not scrambling to find funds a few months in.
Related Content: Can I Make Money Owning A Franchise?
Contact Us With Questions About Financing A C-Lovers Franchise.
Written by Wayne Maillet, president of Franchise Specialists. Wayne is a leading Canadian franchise management consultant and published author of the book Franchising Demystified. You can order the book at http://www.franchisingdemystified.com/ Wayne Maillet can be reached at 604-941-4361