Category: Franchise Funding

A recent survey from franchise portal TotalFranchise.co.uk that attracts over 40,000 unique visitors per month, confirms what I hear on a daily basis when speaking with franchisee candidates. Specifically, sourcing the franchise fee and working capital is the biggest challenge.

Beyond funding as an issue for 56%, the survey found that the primary concerns for franchisee candidates include:

• 21% lacking confidence in the franchise model to work as expected;


• 4% having a fear of failure;


• 4% having concerns over cash flow whilst building a business and


• 2% having concerns about their skills to run a business.

While these secondary issues can be successfully addressed by franchisors, overcoming the funding issue requires greater assistance from the banks. Of course, franchisee candidates needs to have a decent credit history and some cash to invest in a business. At least once a day I speak to a franchisee candidates who has little or no cash whatsoever, yet they are looking at franchise opportunities. In these cases I educate the candidate on all the options for sourcing funding (family/friends, pension/retirement fund, equity in the home, bank loan, etc.), but advise that they may want to put search on hold. As not only do they need to source the franchisee fee but they also need to have enough to cover business and home expenses for at least 6 months. Without this in place, they are most likely setting themselves up for failure which goes against what franchising is all about!

A recent report commissioned by the UK based Women's Enterprise Task Force (WETF) dispels the myth that female businesses owners are charged more than men for loans by banks. The report also found that women tend to be better at repayment than their male counterparts and that their businesses are often seen by banks as lower risk.

Other key findings include:

*women succeed at or above the rates of men when seeking bank finance, which is a major encouragement to women thinking of starting up in business in this challenging climate.

*women are less likely than men to have been rejected due to poor business planning, and are less likely to have been unable to make a repayment on loans, suggesting that women can be better at managing their business finances.

*women are less likely than men to have the knowledge and confidence to access venture capital and equity funding, which can be productive sources of growth finance. To address this issue, the WETF inspired the creation of the Aspire Fund, a co-investment fund that targets high-growth women-owned businesses. The fund has made its first investment and is considering further ventures.

*women constitute more than half of the population and 46% of the British labour market however they are less than half as likely as men to start a business, and make up only 28% of the self-employed. Even with this under-representation, it is estimated that women's enterprise contributes £130 billion turnover and £70 billion GVA each year to the British economy. If British women were to reach the enterprise levels of their US counterparts, there would be an estimated 900,000 more start-ups and £23 billion more GVA each year.

To read the report in full, visit the Women's Enterprise Task Force website.

Many people who independently investigate franchising are often overwhelmed with the fees associated with franchising. Most people are familiar with the franchise fee. The franchise fee is a one time up front fee that franchisees pay to be part of the franchise. It is typically not a revenue generator for the franchisor as franchise fees are used to cover the cost associated with recruiting and training new franchisees.

Franchisors therefore makes money from collecting royalties from their franchise owners. Royalties generally fall into two categories: a flat fee or a percentage of gross sales collected monthly or weekly bases. It is in their best interest for the franchisees to be successful because the more money they make, the more money they make.

Many companies also have a marketing or advertising fee. This can be a small cost in a retail type business that has a sign that offers exposure to the potential customer, but in other types of businesses (those service based) the cost of finding customers can cost a significant amount.

There can be a separate fee called a territory fee. It is a fee franchisees pay for the protected rights for a specific geographic market. It can be based on pure population, by postcode or county or some division of population such as 50,000 people who have £50,000 incomes or better. In many instances, this fee is wrapped up into the franchise fee.

Either way, it is not the monthly percentages or pounds in fees that franchisees should be as concerned about, but rather at the end of the day (less fees paid to the franchise) are they putting the amount of money in their bank account that they desire. It is for this reason why I encourage all my franchisee candidates to stay with the investigation long enough to speak with existing owners and build a financial model. Only then will they truly
understand whether or not the business is truly financially viable.

Based on results from the 2008 NatWest/British Franchise Association Survey, 81% of new franchisees secured funding from a retail bank to start up their new business. The loan amounts varied but it accounted for anywhere from 50% - 70% of the start up cost needed to fund a franchise business.

Now, as lending criterias tighten, franchisee candidates continue to source funds from the banks but also through alternative means. This include leveraging assets including:

1. Home Equity
2. Pensions
3. Savings: ISA, Endowment, Bonds/Collective Invest, Share portfolio, etc.
4. Family Trusts: Inheritance, Family Assets, etc.

Whether or not any of these are appropriate, really comes down to each franchisee candidate's individual situation. Thus, would recommend getting expert advise from a Independent Financial Adviser like Kingswood Law. Particularly as anyone who embarks on a life changing decision to start a franchise business needs to take a business minded view in a number of key financial areas as this will undoubtedly affect their success.

Three key issues for each franchisee candidate to consider include:

1. To explore the low cost or even no cost ways to fund your business to ensure you get off to the best possible start in whatever business venture you decide. After all, any interest payments you have to make will be funded from your profits
2. To understand how to maintain access to a supply of low cost funds in the future to help your business grow and to take any pressure off cash flow problems as you establish your business.
3. Once established, you may want to understand the best way to protect both the business and your personal assets. This is just good planning as in the real world things don't always go according to plan. So minimising personal guarantees, and the risk to the family home are crucial.

So in addition to seeing a franchise business banker, would definitely encourage all franchisee candidates to discuss their new venture with an Independent Financial Adviser. Yes, you want to get access to the funds necessary to start up but you also want to make sure that you protect you and your family's way of life.

Below is an excerpt of an article I wrote for Women Unlimited on how to finance a franchise business.

Banks Will Lend 50-70% Needed to Launch a Franchise Business

by Ursula Barzey, Women Unlimited, 6 January 2009

Most franchisors require that their franchisee candidates have a certain level of net worth and liquidity as part of their qualification process. This requirement is in place as bank funding is typically needed to secure some of the money needed to get the business up and running. For example, if opening a retail franchise, a franchisee candidate will need to budget for:

• Franchise Fee
• Opening Cost: Training Course, Operational Manuals, Site Selection, Start-Up Materials, Legal and Management Fees, Build-Out Supervision, etc.
• Initial Marketing Costs
• Store Development Costs: Signage, Equipment, Computers, Fixtures, Displays, etc.
• Initial Inventory
• Other Expenditures: Rent, Security Deposits, Insurance, Licenses, Permits, Staff Advertising, Travel, Accommodations, etc.
• Working Capital: 3 to 6 months

Once you start putting together the budget figures, most franchisee candidates begin to realise that setting up a retail franchise takes more than entrepreneurial verve; it requires a substantial amount of start-up capital to begin with. In fact, according to the 2008 NatWest BFA Franchise Survey, the total start-up cost for a store retail franchise is typically around £160K. The average start-up fee across all franchise operations is £64,900.

To read the article in full, visit the Women Unlimited Internet site.