Finance – Questions to ask when franchising your business

Franchising your Business

We caught up with Suki Dehal, Franchise Development Manager, for Lloyd’s Bank to ask him some of the hard questions Franchisors or Franchisees face when dealing with funding.

What challenges does a potential franchisor face when it comes to getting funding from a bank? Would the challenges they face vary depending on where they are in the franchising process?
When looking to fund franchise development plans, banks will want to gain confidence in the model being produced. The first challenge will be around which professionals you use to set up the franchise, are they BFA accredited, have they got a track record of successfully helping businesses franchise? These are areas that banks will want to discuss further to ensure they can be confident in your ability to successfully grow via franchising. Another key challenge will be around the viability of the model. Bank’s will want to ensure that you have more than just a concept, that you have successfully ran the business in your own territory first, before looking to grow. They will also look to prove affordability for any proposed borrowing from the existing trading business, so ensure there is sufficient profitability to meet any new commitments. 

Does a franchisor have to bank with a specific bank that specialises in franchising? 
Whilst it isn’t essential for a franchisor to bank with a BFA accredited banks, we would encourage you to build relationships with these banks to ensure that your franchisees can successfully obtain finance to invest into your networks. Typically banks with specialist franchise departments will understand the growth potential in franchising and can look at supporting your journey through every stage accordingly. These will be the banks that are able to put in place bespoke packages based on the needs of your franchises, as they have additional confidence in the sector derived from supporting previous franchise businesses.

How can a franchisor be prepared when going to a bank to ask for funding? 
Franchisors should ensure they have up to date financials available for their business, along with financials to show how their own business grew since start-up. Bank’s will want to ensure that not only is new proposed borrowing affordable, but also that there is sufficient profit margins for a franchisee to replicate the success with additional franchise fees. It’s important to make sure that the business has the ability to offer support to a franchisor without compromising the underlying performance of the franchisor’s own business. The prospective franchisor’s business plan will formulate how the support will be offered and allow you to display to bank manager’s how prospective territories display sufficient demand to replicate your own success. With this in mind it’s important to be realistic with your recruitment ambitions, ensure your ambitions are in line with what’s been achieved by other franchisors in similar market places. 

How can a franchisor or franchisee build a relationship with a bank?
Banks with specialist franchise teams will be keen to learn about your models and will be happy to discuss your plans with you directly. Contact details can be obtained via the BFA website or from the bank’s own websites in their franchise sections. These banks will be keen to hear from you at least on an annual basis to track how the model grows, which will enable them to improve the terms available to your franchisees moving forwards.

How can banks offer support to franchisees?
Banks with specialist franchise teams will be able to ensure that franchisees are able to obtain funding to invest in your models. With their knowledge of your successful business they will be able to take comfort in your training and support programme, which gives additional confidence in franchisees ability to replicate your success. Banks will also have the benefit of seeing how your franchisees operate their accounts whilst banking with them to give further confidence in projections put forward. As your network grows the banks will be able to increase the level of funding available based on the track record of success achieved. In addition to this banks have business plan templates available to support the production of your own template for your franchisees.

Why is creating a good business plan so important?
The business plan is a fundamental document for any franchisee looking to gain funding support from a bank for their franchise investment. The plan will outline how the franchisee will run the business in their own territory and outline important factors such as the competition and marketplace of their own territory. However the business plan shouldn’t just be used at the start-up stage of the business. It should be a working document that is updated at least on an annual basis to ensure franchisees are able to plan for any changes in their areas. The plan can be an essential tool in franchisors development meetings with franchisees to ensure that all opportunities are being maximised and to keep a close eye on the financial performance of the business against the original projections.

How much will a bank typically lend for an established franchise brand?
The level of funding available for franchisees will vary for numerous reasons. Firstly different banks will have different levels of appetite depending on the sector that the business operates in. This will depend on the banks’ own history funding that sector and will be a starting point for the level of funding available. The next variable will be the strength of the individual model. Typically for new franchise brands banks will look to lend around 50% of the total investment costs. As the brand develops and establishes a track record of success, this level can increase up to 70% of the total investment costs. The remainder will need to be put forward by the franchisee from none-borrowed funds of their own.

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