Fi­nanc­ing your fran­chise

FOOD, R FUEL FR ARE APP RE­TAIL AND RANCHISES PEAL­ING TO

Finweek English Edition - - COVER STORY - Si­mone Cooper

Un­less you have enough money to pay in cash, you will need to find a way to f inance your fran­chise. This is not an easy task, es­pe­cially in to­day’s trad­ing en­vi­ron­ment, but South African lenders recog­nise the po­ten­tial of franchising, and as th­ese ven­tures ul­ti­mately carry less risk (with their proven busi­ness mod­els), the fran­chisee has the up­per hand when it comes to loan ap­provals. How­ever, the bank isn’t go­ing to dish out fi­nance if the prospec­tive fran­chisee hasn’t done some se­ri­ous home­work!

Mark Rose, head of New Busi­ness De­vel­op­ment for Ned­bank Busi­ness Bank­ing, com­ments: “When we deal with fran­chisees that al­ready own ex­ist­ing op­er­a­tions, we take into ac­count track record and past per­for­mance of the fran­chisee as

key cri­te­ria to the lend­ing.” This is to avoid any form of reck­less lend­ing. Banks will need to look at your track record to de­ci­pher pos­si­ble strengths and weak­nesses of the op­er­a­tion. “En­trepreneurs must be fi­nan­cially fit,” says Si­mone Cooper, head of franchising and En­ter­prise De­vel­op­ment at Stan­dard Bank. She says that be­fore ap­proach­ing t he bank, the prospec­tive fran­chisee should first be ap­proved by the fran­chisor. “Next, he or she will need to gather all the nec­es­sary in­for­ma­tion re­quired by the bank.” Ex­am­ples of this would be per­sonal fi­nance in­for­ma­tion (state­ment of as­sets and li­a­bil­i­ties), com­pre­hen­sive fi­nan­cials for the busi­ness in­clud­ing pro­jec­tions and cash f lows (if the fran­chise is an ex­ist­ing con­cern) and a busi­ness plan.

I F YOU’RE A NEW­COMER TO THE WORLD OF BUSI­NESS AND FI­NANCE,

Ned­bank tends to as­sess ‘new to in­dus­try’ fran­chisee ap­pli­ca­tions with a more cau­tious ap­proach as the ap­pli­cants still need to prove them­selves in their busi­ness. But in this case, sup­port in­ter­ven­tions, or busi­ness men­tor­ship to sup­port the busi­ness owner, are con­sid­ered. Al­though di­rect in­dus­try ex­pe­ri­ence is not a pre­req­ui­site, gen­eral busi­ness acu­men is es­sen­tial.

FRAN­CHISEES NEED TO DEMON­STRATE

that they have fully in­ves­ti­gated the sec­tor and brand they wish to sign up to. Rose says: “In this case, the fol­low­ing ques­tions will be asked: Have you ob­tained tes­ti­mo­ni­als from ex­ist­ing fran­chisees within the brand? Have you sought le­gal opin­ion on the agree­ments to be signed? And you are able to in­vest your own cap­i­tal to en­sure fu­ture sus­tain­abil­ity of the busi­ness?” The re­quired min­i­mum un­en­cum­bered cash con­tri­bu­tion ranges from 30% to 60%, de­pend­ing on the type of con­cept be­ing con­sid­ered.

In terms of as­sess­ing fi­nan­cial fea­si­bil­ity of a prospec­tive fran­chise op­er­a­tion, Rose says that ‘ bench­mark­ing’ of cer­tain f inan­cial ra­tios is con­sid­ered with em­pha­sis be­ing placed on in­di­vid­ual brand data, sup­ported by ad­di­tional in­dus­try anal­y­sis/in­put. Ul­ti­mately, the busi­ness’ pro­jec­tions (at least two years) need to demon­strate prof­itabil­ity and ad­e­quate af­ford­abil­ity with re­gards to ‘debt ser­vic­ing’.

Both Stan­dard Bank and Ned­bank of­fer com­pet­i­tive as­set f inanc­ing so­lu­tions that are fol­lowed by ac­tive par­tic­i­pa­tion from the lenders as far as re­pay­ment struc­tur­ing is con­cerned. Both banks also of­fer pay­ment and col­lec­tion ca­pa­bil­i­ties, such as point of sales de­vices as well as busi­ness cur­rent ac­count ser­vices with over­draft fa­cil­i­ties. Al­though banks will not take an ac­tive role in man­age­ment, they do of­fer mar­ket in­tel­li­gence ser­vices such as de­mo­graphic and in­dus­try anal­y­sis. Should fran­chisees find them­selves in fi­nan­cial dif­fi­culty, both banks of­fer in­for­mal busi­ness res­cue ser­vices to as­sist with turn­ing the busi­ness around.

WHICH SEC­TORS ARE AP­PEAL­ING TO LENDERS?

Stan­dard Bank fo­cuses on fran­chises that are in ei­ther the re­tail, fast food, fuel sta­tion, au­to­mo­tive or telecom­mu­ni­ca­tions sec­tors. Ned­bank fo­cuses on what they be­lieve to be the three most prom­i­nent fran­chise sec­tors – food, re­tail and fuel. “Th­ese sec­tors have demon­strated the most growth and seem­ingly best ROI,” says Rose. Lenders are gen­er­ally most com­fort­able di­rect­ing fi­nance to­ward sec­tors with which they have had pre­vi­ous ex­pe­ri­ence. This al­lows them to take com­fort in iden­ti­fy­ing early trends and risks that are preva­lent to each sec­tor.

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