Franchised businesses have a greater rate of success than independent start-ups. High brand awareness and reputation, access to working capital from franchisees, efficiencies in marketing, training and product development, established systems and processes…it can be a very scalable and profitable model.
That’s why you’re in the franchise game, right?
But this doesn’t mean it’s easy for franchisors or franchisees to get finance from the banks to grow and reach their goals, particularly in challenging economic markets such as the one we’re facing right now. In fact, our experience tells us that even well-known franchise systems struggle to get finance for their franchisees if they’re not adequately prepared.
We wanted to share some key things you can do to get your franchise ‘finance ready’ with the banks – and make it more likely for them to say “yes”!
1. Build your franchise strategy to sell your strengths
The more the banks know about your strengths as a franchisor, the more they will be willing to lend. So, start by setting a solid franchise strategy and collect as much information as you can to support it. Then sell this story to the banks.
Before the banks will provide franchise finance, they will want to know about your:
- Brand footprint
- Target market
- Financial strength and capital adequacy
- Management profile
- Compliance controls and reporting systems
- Recruitment process and profiling
- Support offered to the franchisee network, especially those in distress – Is there a history of helping out or buy-backs?
- Site selection process
- Expansion strategy
- Training of franchisees (both initial and ongoing)
- Assumptions around purchase and fit-out costs (and refit costs)
- Openness to Tripartite Agreements with the banks
- Viability of franchisor cash flow – Is it via royalties alone, or heavily reliant on sales?
Remember that banks and franchisors have aligned interests – you both want to make money and see growth in the franchise business. But any business involves risk, and the banks will be on high alert when it comes to your growth plan and your capability to deliver. Aim to close the ‘uncertainty gap’.
2. Build strong relationships with the major banks
Build your brand awareness with as many of the major banks as possible. The process requires a lot of time and information, and each bank has a different process when it comes to finance applications.
Through this process, it can be useful to partner with a consultant who can coach you through and can connect you to the key franchise bankers. If you’re not yet at that scale or don’t have the capital required for finance, there are many things you can do to work towards getting there. Starting conversation with the banks early on will set you on the right path.
3. Create an efficient and seamless franchisee recruitment process
Sifting through unqualified leads can be a drain on your resources, confidence and marketing money, and the cost of recruiting a poor franchisee to your brand can be very damaging.
Spend some time developing a comprehensive and seamless recruitment process that ensures quality over quantity when it comes to compatible prospects. Don’t rush this and engage a franchise recruitment specialist if you think you won’t have the time or resources to do it well.
We recommend you start with comprehensive profiling of your target franchisees, so you accurately understand the demographics and needs of your prospects. The best approach is to leverage a data tool that utilises both normative and ipsative scoring methods. This gives you greater accuracy in predicting business success than tools that use single science or single scoring methods.
This meta-analysis methodology has really changed the way franchisors select franchisees. The profiling reports compare prospective franchisees to your individual profile benchmarks, so you can see instantly which candidates are compatible and have the greatest potential for performance.
Once you know who you’re targeting, incorporate finance-related questions into your prospective franchisee application forms to help reduce time spent on weak leads.
These application questions should cover off on the franchisee’s:
- Experience – Do they have experience in the same industry (ideal is 3+ years in the same industry)?
- Level of business acumen – e.g. prior experience running a small business
- Cultural fit
- Cash flow – Are there any income sources outside the new franchise site cash flow? Are they a multi-site operator?
- Collateral, including their personal assets and liabilities (property/home loans, cash, superannuation etc.) – Can they afford to run their personal life and the business?
- Capital – Is there spare cash/liquidity available, if required?
- Reason to buy – Why do they want to buy this franchise? What is their long-term strategy?
- Management – Who will be running the franchise? How will they be able to invest the adequate time and hard work the business needs to succeed?
- Market research – Have the franchisees spoken to other franchisees? Do they fully understand the physical operation and effort required to run the business? (e.g. getting up at 3am to bake cakes!)
Make sure to comprehensively evaluate the expectations of your prospective franchisees along with their values and cultural fit to the franchise brand.
4. Connect yourself with a strong commercial finance broker
When it comes to getting the best finance to grow your business, the relationship your brand has with the banks is paramount. Finance brokers spend their days developing strong relationships with all the commercial banks, and they can be a great ally and support when it comes to getting in front of the right people.
Finance brokers also do a lot of the leg work for you, saving you time to focus on other aspects of the business.
Alternatively, as we mentioned above in point 2, build close relationships directly with franchise bankers and good business bankers at each bank. Offer your relationships with your broker and the bankers to your franchisees so they can build relationships too.
Is your franchise finance-ready?
Hopefully, the above tips have helped you to understand what’s required to give your franchise the best chance at success when it comes to securing finance for your franchisees.
If you would still like some advice on franchise finance, our multidisciplinary franchise team is well-placed to deliver cost-effective, time-efficient and innovative advice on every aspect of your franchise system.
Feel free to reach out to a BlueRock franchise specialist.
Author: Steven Whiteside, director, BlueRock Finance
