In terms of funding your franchise purchase, the entry price to buy into a franchise can vary greatly, from tens of thousands to $500,000-plus, so unless you’re like Mason and are able to cash in on investments to fund the purchase, you’ll probably need to acquire finance. "I would say the majority of franchisees would be taking on some form of debt. Sometimes that’s an overdraft, sometimes it’s a mortgage secured against their house, and sometimes it’s a mortgage secured against the franchise," explains McFedries.
"Generally, the amount franchisees borrow should always reflect the ability of the business to generate sufficient cash flows to repay all business and personal commitments and living expenses, and provide a reasonable investment return," explains Cannock.
"We strongly recommend that a franchisee contributes a reasonable deposit (up to 50 percent) to the purchase of the business. This will ensure that their business is not overburdened with loan repayment commitments before it has the opportunity to generate a sustainable level of cash flow."
Over the years, the lending for franchisees in Australia has become more sophisticated. There is now an accreditation process franchisors can go through with certain banks, which could translate into a better lending rate for franchisees because the bank has taken some time to understand them. It’s worth checking with franchisors if they have such accreditation.
"ANZ has developed relationships with many franchise systems and is able to offer special lending packages that allow potential franchisees to raise part of the purchase price against the value of the franchise they are purchasing," Cannock says.
Jones was able to secure finance through ANZ, with his father as guarantor. And while his store was the first Cold Rock in Victoria to use ANZ finance, other stores in the franchise system had used the bank, setting a good example for new franchisees like Jones.
"Lenders look for franchisees who are able to demonstrate that they have thoroughly researched the business or franchise they are acquiring," Cannock explains. "This will include a comprehensive business plan and a strong understanding of what is required for the business to be a success. Other critical elements that are taken into consideration include appropriate financial backing, business acumen, and experience in the relevant industry.
"A strong franchise system will be one that has high brand and product recognition, a differentiated competitive offering, excellent growth potential and future plans. Importantly, it will also have a demonstrated track record in supporting the interests of franchisees to help them achieve their growth aspirations."
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