You have selected, or are selecting a Canadian franchise. You’re down to those two last seemingly minor questions – how much does the franchise cost, and what franchise financing is available! Pardon our questions, but those are hardly minor points.
Franchise opportunities in Canada seem unlimited these days as the industry continues to grow and grow. A huge portion of the Canadian economy is services by franchisors and their franchisees in Canada.
There is no one method that serves all you’re financing needs for your new proposed business. However several tried and true methods of financing are utilized successfully everyday in Canada; let’s explore some of those methods and hopefully provide you with tips, strategies and tactics to successfully complete you business acquisition. In most cases you will be buying, or building a franchise with your franchisor partner, in some instances you are negotiating with an existing franchisee to purchase their business. Both of these scenarios are financed differently.
In the case of purchasing an existing franchise a more formulaic approach is available to you. The basic process involves negotiating a fair price around the business, validating the financial statements of the owner, and, more often than not, obtaining an appraisal of any of the hard assets and leaseholds of the business. The appraisal value is a key point in your overall financing strategy. We also caution business clients to take some time to ‘ normalize’ the financial statements of the existing business. This is what even sophisticated financial analysts do when they are looking at a merger or acquisition type scenario. The process simply involves taking a look at all the costs and expenses and eliminating those that might not be relevant as you move the new business forward.
Quick example on the above: Previous owner is taking 80,000.00 out in salary; you feel you can continue with a 50k salary – that obviously allows you to put 30k of profit and cash flow back into your business assumptions. You might well want to utilize the services of a trusted, credible and experienced financial advisor who can assist you in this area if you are a non- financial type!
The most common method of financing a franchise in Canada, existing or new, is a BIL.Great says our clients, now what is that?! It’s the technical name for the Canadian governments Small Business Financing program, and it provides up to 350k in financing for your business. Sounds great, right?
The challenge our clients face is typically understanding the criteria of the program, how it works, what information and back up is required to process a financing, and what other types of financing might compliment this proven and popular strategy. (We have found equipment financing or leasing to be a great add on complement to the government loan strategy)
Franchise financing around the franchise cost should not be viewed as coming from your franchisor, they are in the business of building their empire, not financing yours! That is a common misconception among clients.
However, in the case of purchasing an existing franchise you may well want to negotiate at least a nominal (or greater if you can!) vendor take back to compliment the overall financing. It’s a great strategy that motivates you and the current franchisee to work together to continue the success of the business.
Our final point and tip around franchise cost is clearly to assess what your own investment will be in the business. Typically franchise lenders are looking to get a very reasonable owner equity or down payment on the transaction, which is of course relative to the size of the business you are buying or starting.
Speak to a trusted Canadian business financing advisor to ensure you have a clear strategy and a solid plan to finance your entrepreneurial vision.