Franchising Loan What’s The Difference Between Franchise Finance And Other Business Loans

It’s a great client question: What in fact is the difference between a franchising loan and a regular business loan when it comes to arranging franchise finance in Canada?

The answer? There are some differences, but you just might be surprised at the similarities when it comes to comparing the two. Let’s explain.

When it comes to the ‘ players ‘ in your finance loan, it’s pretty simple. Contributions are required from you, and your lender / lenders! In Canada those lenders are specialized franchise financing firms, banks, and third party commercial finance companies. While it is extremely difficult in Canada to obtain full financing for your franchise via a Canadian chartered bank the good news is that thousands of franchises are financed via the Government Small Business Loan which can provide funding up to $ $350,000. That’s not chump change! . And when you hear what rates and terms and structures are required you’ll be even more pleasantly surprised.

Clearly franchising fits into the area of the SME sector of Canada, and for that reason a lot of the challenges that the franchisee faces revolve around the same issues faced by any other start up. Yes , we agree that you’re acquiring ( hopefully ) a proven business model but the early stage financing required to get you to a turnkey ‘ in business ‘ stage is still viewed as placing a heavy onus on the entrepreneur to come up with a decent portion of the capital yourself .

Franchising, as well as any other type of business requires two key components for initial capital… a ‘ plan ‘ and ‘management expertise “. And that plan by the way is known as the ‘ business plan ‘ – which is simply your well thought out road map to financial and operational success.

The type of financing that you obtain when you finance a franchise revolves specifically around ‘ use of funds ‘, another common term for any other business financing. In your case that might be real estate, construction, equipment and fixtures, leaseholds, and some opening inventory if you have a product as opposed to a service franchise.

We mentioned the Govt business loan previously as a great conduit to get you approved for your new business. But we point to out clients that that loan program only covers equipment and leaseholds, so items such as the franchisee fee and opening inventory are not financeable. We wish they were… but they’re not!

We have referenced the fact that while Canadian banks provide millions every year for entrepreneurs in the franchise sector via the specialized BIL loan, they in general are reluctant to finance the business outside the Govt program. So discussions around bank financing quickly gravitate to personal collateral, home equity collateralization, etc. It’s simply not the optimal way to go if you want to separate your business life from your personal life.

Another strong similarity in franchise finance when compared to other business financing is the fact that a strong emphasis is placed on your personal financial history. This is typically documented by your credit report and a solid amount of emphasis is placed on this report. In Canada this report is in effect a scoring system and a good score of ‘ 650’ is required.
Simply speaking, the bank or any other commercial lender wants to know you will run your own business in the same manner as you have arranged and run your personal finances, and that of course makes sense – especially if you’re the lender!

So as we have seen many of the concepts and lender views around any business finance loan or proposal pertain to franchise finance, with some nuances / differences. Seek out and speak to a trusted, credible and experienced Canadian business financing advisor for franchise finance assistance.

All About Franchising And Starting Up A New Franchise Business

Copyright 2006 Peter Hayes

Franchise business opportunities are expanding rapidly. If you look at the most famous franchise in existence today is the McDonalds corporation. McDonalds has established itself around the world and is one of the leading business organizations. Opportunities in franchising continue to develop as the franchise industry develops.

What is a franchise?

Information on the Franchise Business

A franchise is a mirror image of an original business idea. When a business has become successful the opportunity arises to duplicate the success in other locations. When an individual purchases a franchise opportunity, they are purchasing is the right to repeat the original business operations in another area. To help them achieve success a franchisee receives complete instructions on how to achieve the success achieved by the original business. They get an established and proven business plan and marketing plan on which to build their new business.

A franchise has been granted the authorization to sell or distribute a companys goods or services in a certain geographical area. For example, a restaurant or coffee shops marketing area is limited, usually to people in the immediate local area. Therefore, creating another restaurant or coffee house based on the original business in a different area would be considered a franchise.

The original business developer determines the formula for producing the same result achieved by the original business and how this formula can be repeated in new locations. This formula is packaged and sold as a franchise. This package is sold to interested parties who can achieve success simply by following the proven formula.

Why Do Businesses Sell Franchises rather than Expanding their own Business?

What is the advantage of developing a franchise as opposed to simply opening the business in multiple locations? It is quite possible to open a number of restaurants in one city or county or even within a state. However, the time requirements and energy required to do this is extensive. Franchising offers th possibility to expand the business and have others on board to share the burden.

It would be impossible for someone like Roy Croc, who developed McDonalds, to run each individual McDonalds restaurant around the world. To expand your business without running it into the ground, you need quality people who have an interest at your own bottom line.

Information on Buying a Franchise Business

Many people would like the freedom to start their own business. However, they may be new to the business world. Or they may not be confident of their ability to develop a business. Or they may not have a business idea that they are confident in.

The opportunity to start a business that has a proven success record and an established plan for achieving a similar success is what make franchising attractive to new business owners.

This is beneficial to both the original business developer and the entrepreneur. The business developer makes a profit by selling his system and the entrepreneur gains the knowledge from an experienced owner with a successful business. This increases the opportunities for the entrepreneur, which allows for a greater chance of success.

Should You Start a New Business or Go the Franchising Route

Starting a business is a huge risk, but the payoff could be huge if your business succeeds. However, many are wary about starting a business from scratch because they think that it’s riskier compared with going into the franchising business. Some people think that buying a franchise is more advisable because there’s an established market. There are benefits of starting your own business from the ground up; for instance, you don’t have to worry about franchising fees or royalties. However, you might have to work extra hard before you get significant return on investment. This could be a huge disadvantage. This is not to say that it’s guaranteed that you’ll get rich instantly with a business franchise; it’s like any type of business, so this means there are huge risks as well. The difference is the fact that you’ll be working with a business that has a reputation and a customer base. Some people think profit from franchising is considerable because you’ll be working on a tried and tested business idea. You don’t have to work too hard on increasing brand awareness because people are also more familiar with the products or services that you offer. Aside from the potential profit, starting a franchise gives you more flexible hours. You can now have more free time to spend with your family and improve your lifestyle. If you are not sure whether or not you should start a new business or invest on an established one, you could consult a business coach. These people can tell a clearer picture and inform you about the risks and rewards of choosing either one. If you choose to buy a franchise, make sure that you read the company profile and see if you’ll have greater return on investment with it. Careful research goes a long way, and you could lessen the risk by choosing a franchise that’s under an industry that you’re more familiar with. If you want to try your luck on a new business, you should research on market trends and try to offer something new. There are advantages and disadvantages of starting a new business or buying a franchise. You need to assess your particular situation and see which one is more suitable so that you can be successful. If you want to learn more information on the subject, you can go to entrepreneur.com or franchises.about.com.

Could Franchising Be The Business For Me

Most people are familiar with franchising. For the benefit of those who are not, according to http://wikipedia.com franchising is the system of doing business wherein a franchisor licenses trademarks of a product and tested methods of doing business to a franchisee to receive payment like a percentage from gross per sales or gross profits as well as the annual fees agreed upon, as compensation for the trade secrets shared as part of the franchising agreement. Sometimes legal contracts may vary as to the terms of franchise and may not fit the definition above. Sometimes, the methods on how to do the business may not be part of the franchise or other benefits that other franchising companies give may not be available to others.

The most common franchising companies known to the public would be chain of food stores like McDonald’s which nowadays offer some franchising strategies to reach a wider consumer market. McDonald’s has become a household name since it was able to reach a wider consumer market that is not only limited to the United States and the Americas but to the rest of the world. The success behind McDonald’s becoming a household name and the one of the most known trademarks around the world is due to the system of franchising. Aside from the buildings that McDonald’s rent to the franchisee, it also has a stake on the sales of the franchise and the cost of the supplies charged to the franchisee. To help out in the quality of products and services offered in each food chain, McDonald’s sends a member from the franchisee to their Hamburger University in Oak Brook, Illinois. This is one support benefit that the franchisee would get once they franchise a restaurant for McDonald’s.

Like any business, there are advantages and disadvantages that franchising offer to anyone who wish to venture into it.

Advantages

Popular labels are widely known and are likely to sell. Popular trademarks like McDonald’s are likely to sell than a new restaurant that has not reached a market such as McDonald’s. It is selling a well known product to a consumer market which knows the product being sold.

No need to develop a new product that has not been well researched. Venturing into franchising would allow the franchisee to have access to information that the franchisor have about an existing product and put up a business in a shorter period of time.

Trainings and seminars would be provided to the franchisee about the product. It would be easier to operate and manage the business since there are available trainings and other support methods for the franchisee.

Disadvantages

High standards held by the franchisor raise costs of maintenance in the franchise. Since the standards of the franchisor would definitely be high, sometimes the cost of maintaining a franchise can escalate. Unless the materials used would be second rate and low in cost.

Development of new products might still need to be passed for approval to the franchisor. If the franchisee would like to add a product which they think would be saleable in their market range, the new product has to be approved first by the franchisor and this may take time and it would likely be rejected if it does not meet standards of the trademark.

Profit is limited since the franchisor has stake, most of the time, on the profits of the franchise. Not only does the franchisee have little control of the franchise due to many stakes that the franchisor has on the franchise, the profit of the franchise would also be split between the two. Therefore, there is a limit to how much the franchise would earn.

Even if there are several disadvantages in franchising, still there are advantages. If you think you could handle this kind of business, all I can say is, business is gambling. In any industry there are players and you might be lucky that you would be on top once and sometimes at the bottom. Get to know the game play and start playing to win the game.

The Issues and Strategies of Franchising a Brand

However, the process for turning a network into a franchise begins long before the first advertisements are placed for potential franchisees. The people who run the business, whether they are main board directors of a Plc, or are virtually a one-man band, must first gain a full comprehension of how to franchise, including its advantages and disadvantages, and its likely effect on their existing operation.

Only when fully armed with all the relevant information should a network make the decision to become a franchisor. This information includes hard elements, such as the financial aspects, and the softer, personal elements of the unique franchisor/franchisee relationship.

It is crucial to look very closely at the more personal elements because there is much more to building a successful franchise than the cold legal agreement and financial projections. Whilst advice on these matters from properly qualified experts is, of course, essential it must be considered in tandem with issues concerning human resources and personal development. Make no mistake, if a business becomes a franchisor, personal development is the name of the game.

Whatever it is you do now, whether you are a restaurateur, printer, carpet cleaner, car tuner, fashion retailer, or deliverer of parcels, your business enterprise will change when you become a franchisor. It will then be all about recruiting, training, monitoring and motivating people who want to run a network under your name, using your system and operated to your standards.

They will be expecting leadership and direction; guidance when they want to expand, or when they meet the inevitable problems; on-going training and marketing support; and the product or service development to keep their concept at the forefront of its marketplace. They will also expect you to create and maintain standards, both in your own firm and throughout the network.

As this is what you will have promised them when they were taking a look at joining you as a franchisee, you had better deliver it. Whatever happened, you may ask, to running a restaurant, printing, cleaning carpets, tuning cars, and so on?

If you are ready for this fundamental change, let us look at how we decide whether a company is franchiseable. We will investigate firstly the mechanics and then the cultural implications.

Five-star franchising

Just about any type of firm that operates as a branch network has been already franchised somewhere in the world.

In the U.S. for example, you can be born in a franchised maternity hospital, buy just about every product and service you will need in your lifetime from franchised outlets, then be seen off by a franchised undertaker, and finally buried in a franchised cemetery. However, not every network that has tried to franchise has been successful, and this is due to a number of reasons. To create a successful franchised network certain key elements need to be present. These are:-

A business with a clearly defined image and system of operation, both at branch and head office levels.

A brand with a proven and successful format suitable for franchising and with a product or service that has stood, or will stand, the test of time.

A network that is easily duplicated and easily learned

A business that generates enough profits to support both the franchisor and the network of franchisees.

A firm which has, or can adapt to, a culture of mutual respect and support, and in which it is clear who is responsible for what, and how often, and how well, they will perform their obligations.

Image and system

The clearly defined image and system are what we call the intellectual property. This includes the trade name, the method of operation and the way in which the various elements of the network come together to make up the franchise formula. None of the elements of the package need to be individually secret. What matters is the way that the franchisor has combined them to create a successful business enterprise system.

Naturally, the trade mark or name has to be owned by the franchisor as he is licensing others to use it, but do not worry if your name is not yet well known. That will not stop franchisees from joining you. After all, even McDonald’s and Marks & Spencer started with only a single outlet.

All the components of the package from the design and layout of the premises, through marketing campaigns, to accounting and administration will be detailed in the franchise manual, and it is the system in the manual that the franchisee agrees to operate.

Proven format

Pilot operations prove that the concept works and it is the evidence of their success that will convince your first franchisees that they should choose your franchise. Even if you have run company-owned branches for years, you must be aware that things will change when you franchise and you must be prepared to run pilot units at arm’s length.

This is just as vital if you currently have company-owned outlets which you are planning to convert to franchises and even if the franchisee is going to be the existing branch manager. Something different will happen when it becomes a franchise, so it is wise to find out what that is before you take the plunge.

Pilot units should, of course, mirror the proposed franchised outlet as far as possible in terms of size, location, catchment area, population profile, staffing and so on. It is no use doing brilliant network from a site in London’s Leicester Square and then expecting a franchisee to be equally as successful in the high street in Leicester. Ideally, you should pilot the concept in two or three places for at least one complete trading cycle.

Pilot operations help to prove that what you thought on paper will work in practice. If it does not, then you still have the chance to adapt it before offering it to franchisees. Pilot units also give you the opportunity to write the manual from practical experience instead of theory.

Easily duplicated

Depending on how many franchisees you need to properly service your potential market, you will not want to have too much difficulty finding premises, or people to join you as franchisees.

If there are a limited number of sites suitable for your network, or it needs particularly unusual conditions (say a constant supply of fresh spring water) then it will not be easy to duplicate in sufficient numbers to support a network. Similarly, if it calls for special skills which few people possess, say something particularly artistic or creative then franchisees will not be able to learn how to do it. Every rule has its exceptions, but mostly speaking the easier it is to duplicate and learn the brand, the easier it will be to franchise it.

Profitable

The whole area of profits and fees is what we call structuring the franchise, and it is one in which you will need professional advice. Do not just look at a similar business enterprise and simply decided to charge the same franchise fees.

Whatever percentage they charge for their management services fee and advertising levy, or the size of the mark-up they charge on supplies, will probably not be appropriate for you, and it may not even be right for them either.

A franchising feasibility study has to evaluate many things. Having sorted out whether the business is proven, and easily duplicated and easily learned, it is then necessary to look at the structure. How big is the market? How much business enterprise can the proposed size of outlet handle? Consequently, how many franchisees will we need?

Having decided the number, what support staff and structure will you need to recruit and support a network of that size? Can the concept make enough to satisfy the franchisee, and give the franchisor a profit?

These and many other concerns are best discussed with someone who has franchising experience as it is easy to overlook fundamental items when you have not had experience as a franchisor.

Naturally, it is sensible to work out the franchisee’s finances first. After all, if it does not work for the franchisee, it will never work for the franchisor. If things look good for the franchisee, then go on to work out your finances as a franchisor. Ideally, you should prepare a three-year profit-and-loss and cash-flow forecasts for both your franchisees and yourself. These can later be used as the basis for brand plans, both for raising finance and the on-going monitoring of the firm.

It is crucial to get the structure right. This may seem obvious, but if one or other of the parties sees the other making all the money or, indeed, if neither of them is making enough, the relationship will come to an end.

The concept, therefore, has to generate enough profit for the franchisee to make a decent living and pay back whatever he borrowed to start the brand, and also make some more on top to re-invest in future improvements. Finally, the network must contribute enough to the franchisor for him to do the same, and in addition provide on-going support to all his franchisees.

So if your company has a low margin it is likely to be tricky to franchise successfully. It also really goes without saying that if your existing concept is not making sufficient profits, franchising will not offer a way out of the problem. In such a situation, you must first put right whatever is wrong and then use franchising to build on your new success.

Franchising culture

None of the above will work if you do not get the relationship right and create a network based upon mutual trust, respect and support. To support franchisees, it is essential that franchisors and their support staff understand the unique relationship between the franchisor and franchisee.

Like all relationships, both parties in franchising have different motivations for becoming involved, and there are advantages and disadvantages on both sides.

For the franchisor, the advantages have mostly to do with using other people’s money to expand the network quicker than would otherwise be possible, whilst having less involvement in the day-to-hassle of running branches. The disadvantages are having to accept that the bulk of the profits from the branches will go to the franchisees, and learning how to deal effectively with people who are using your name and system, but who own their own businesses.

Some research says that it is a relationship which is becoming increasingly attractive to many businesses as proved by the fact that more franchisors come to the market every year. However, other research says that as many as two-thirds of franchisors drop out within the first 10 years.

There may be any number of reasons for firms dropping out, and they are not all due to failure or disappointment with the system, but it is likely that many of those who did withdraw did so because they had failed to understand the principles of good franchising practice before they started and were subsequently unable, or unwilling, to get to grips with the all-important question of the franchisor/ franchisee relationship.

As in many relationships, the major cause of failure is often due to the failure to communicate. It is the franchisor’s job to communicate what the network is trying to achieve; how it will be done; who is responsible for what; and by when it should be done. He should set an example by his own actions, and motivate and encourage franchisees to play their part in making the system successful. Not many networks fail because of the franchisees.

Assuming the franchisor has properly piloted and proven his system, he then needs to understand the motivation of franchisees for choosing this particular form of self-employment. Research tells us that at the top of the list comes reduced risk, marketing and training support, the fulfilment of a long-term desire to have their own business enterprise, and trading under an established name. At fifth place is the level of prospective income.

If you have recruited your franchisees, or sold your franchise, on the strength of the support you will provide, that support had better be there and it had better be good.

The initial step in the direction of mutual understanding is for each party to accept their individual and joint obligations.

Broadly speaking, the franchisor is responsible for marketing and developing the network and its products or services; assisting the franchisee to be profitable; and creating and maintaining standards. The franchisee is responsible for upholding the good name of the franchisor; operating in accordance with the agreement and manual; and maintaining and improving standards. Jointly, the responsibility of both parties is to build a network with a defined image and standards, under a recognised brand name.

Franchisees must be made to recognize from the outset that they are being allowed the opportunity to operate a proven network system, using an established name. They are not opening a business in which they are free to do their own thing. The position of franchisees is, in fact, unique in the field of commercial relationships.

Franchisees are not employees, although they work to instructions and will hopefully have been recruited with as much, if not more, care. They are not customers, although they will have been, and continue to be, sold products or services. They are not, whatever the PR message may say, partners. Not legally, anyway.

They are, in fact, people who have trusted the promises made by the franchisor and his staff to the extent that they are prepared to devote probably their entire financial assets and most of the waking life to the pursuit of the promised opportunity. In return, as we have seen, they expect to receive the support that they have been promised in terms of marketing assistance, training, network planning, product development, and general network advice.

The franchisor’s support staff must realise that their role is to deliver what the franchise sales staff have promised. The recruiters for their part must be careful not to promise more than the franchisor is capable of delivering.

Becoming a franchisor

Franchising is about supporting franchisees in order that they can operate a proven system, and that support must be available to the very first franchisee who joins the network. It may not then be necessary to add to the initial support staff until there are 15 – 20 franchisees, but they all need to be there at the start. If the early franchisees are not supported, they will not succeed and it will then become increasingly difficult to sign up others.

Similarly, the operations manual and legal agreement must also be in place at the start, as must the systems for monitoring and managing the performance of franchisees. Franchising, therefore, requires considerable up-front investment by the franchisor before there is any income stream.

Agreement and manual

The agreement and manual are the documents which lay down the ground rules which govern the relationship. They are linked together through clauses in the agreement, and both need to be professionally prepared by recognised franchising experts.

There is a substantial cost to be met in preparing these documents, but over the life of the network this will appear negligible, and will usually be amortised from the fees of the first few franchisees. Both documents must be properly prepared. Cutting costs here will create problems down the line which will prove far more expensive than taking proper advice at the beginning.

Support staff

Having agreed that franchising has its particular skills, the staff involved in the franchise operation should either have, or quickly acquire, those skills. Basically there are two choices, either recruit experienced franchise managers from outside, or have your own staff trained in franchise management.

Formal training is readily available from the Franchise Training Centre via a series of modules covering marketing the franchise, recruiting franchisees, monitoring franchisee performance and motivating franchisees. Delegates who complete all modules can choose to go on to prepare a dissertation showing how what has been learned has been successfully transferred to the workplace. That results in the award of the diploma in franchise management, which in turn has been accredited by Middlesex University and provides academic credits towards an MA work based learning studies (franchising). Details are available at www.franchise-consultants.com

Prospective franchisees may soon be asking for proof of such qualifications being held by the staff of the franchisor they are planning to join, and perhaps choosing to go with a different network which has more evidence of such a professional process.

Whether there is just one manager doing it all, or a separate one for each of the support functions, staff need to be proficient at recruiting, training, monitoring and motivating franchisees, with all the technology, knowledge and inter-personal skills called for by such responsibilities.

Recruiting franchisees

A franchisor has two marketing responsibilities – one for continuing to market the product or service; the other for marketing the brand opportunity and recruiting franchisees. These are not the same, and require different approaches. Presumably, if he has established the concept, the franchisor already knows how to market his product or service.

The feasibility study and franchise plan will have established how many franchisees are needed and where they should be located. The manual will make it clear what is required of the franchisee in terms of duties, responsibilities, knowledge, skills and attitude.

The franchise marketing plan brings the two together, and the franchisor needs to choose people, or perhaps companies, who fit a pre-determined profile and have the ability to succeed. It usually proves disastrous to simply appoint anyone who has the money to buy the franchise and to locate them wherever there is a blank space on the map.

There are any number of ways of reaching potential franchisees, but no way that is right for every franchisor. Having established a clear idea of what a prospective franchisee looks like, it becomes easier to decide where to look for them.

Professional advice will help to ensure that the concept is properly targeted, leads are handled effectively, and procedures are implemented to accept or reject applicants. The skills required by franchisee recruitment personnel include marketing, selling, business awareness, negotiation, and legal and financial understanding.

Concept plans

Subject to the usual lending criteria, all the banks are keen to lend to franchisees of a properly-structured and proven franchise. Most franchisors present their opportunity to the franchise sections of the banks to clear the way for later applications by their prospects.

Naturally, the franchisee needs his own firm plan, based on the experiences of other franchisees in the system and franchisors, or their approved third parties, can help with the preparation of these plans.

Agreeing company plans (both action plans and financial projections) with franchisees allows more sensible discussion of progress once the outlet is up and running, and most franchisors will insist on franchisees using a particular system of accounting. This can even be overseen by a professional adviser who monitors the performance of the entire network, rather than leaving it to in-house staff.

Once agreement to go ahead has been reached, the franchisor will commence his set-up and support procedure. This will differ in accordance with the type of business and may include help with locating and acquiring a suitable site; converting and equipping premises or vehicles; preparing a marketing launch package; and providing initial stock.

Whatever the business enterprise, it will include training for the franchisee, and probably his staff, in every aspect of the concept. This may be carried out either in classroom style, or hands-on at an existing unit, or in a mixture of the two.

Training is the very essence of franchising. It is how the franchisor passes on the proven format which he has developed and in which the franchisee has decided to invest. Having successfully completed initial training, franchisees should be able, or indeed required, to attend further training on a continuous basis.

On-going support

Franchisees expect and are entitled to continuing support in operating their network, whether this be concerned with new products or systems of operation, training, assistance with company development, encouragement during times of difficulty, and help in finding a purchaser for their concept if they want to move on.

The franchisor must learn how to both motivate and monitor franchises – motivate to encourage them to do better, monitor them to ensure that they are maintaining standards, both for their own good and that of the network as a whole. There are numerous techniques to achieve these aims, and professional advisers can explain how to implement them.

Conclusion

A brand can probably be franchised successfully if it is proven and successful in an established format; capable of being easily duplicated and easily learned; likely to be profitable for both franchisor and franchisees; and the management is prepared to accept considerable operational and cultural changes.

Franchising in the UK has come of age, and there is now a wealth of professional guidance available to prospective franchisors. If you are thinking “Should I franchise my business”, to not take advantage of such advice may turn out to be not just remiss, but fatal to the businesses of the franchisor and his franchisees.

If it is operated properly, franchising is a superb way of building a network in which everybody wins – the franchisor, the franchisees, and through the franchisees’ personal commitment to the success of their local outlets, the customers.