The Life Cycle of a Franchise

By sprokop

 When we talk to clients about their concerns of getting franchise financing in Canada they also want to focus on whether the cost to finance that franchise is in effect a good ‘ return on investment ‘, in relation to both their own personal investment in the business as well as ongoing returns on that equity based on the ongoing profits of the business and the risk involved in this type of business, i.e. franchising!

The amount of capital you need to raise relative to your franchise loan varies in Canada. Factors that are critical here are the amount of capital that in some cases your franchisor might insist you put into the business. Another key factor is of course the amount of funding you are able to raise based upon your own personal financial situation, one factor of which is your personal credit rating. Clearly the majority of franchises in Canada are regarded as ‘ small business’ so it makes sense that the banks and other firms that participate in franchise financing are focusing on you personally as well as your overall business prospects.

Canadian chartered banks, contrary to popular opinion, do participate in franchise financing in Canada. In fact in our opinion you could call them the major lender to the industry. But what many clients don’t understand when looking for franchise financing in Canada is that the bank lending in the franchising industry is done under the auspices of the Government Small Busines Loan, which is perfect suited to the type of financing you probably need.

So how much do franchises cost. We can safely say that they range in price for very nominal amounts such as 10k or so for a small service based franchise to millions of dollars for such large brand names… think ‘ golden arches’ as an example .

Cost factors of your franchise vary with respect to how well your franchisor is doing in Canada, or perhaps it’s often the case of a franchisor in the U.S. who wishes to expand or introduce their presence in Canada.

We mentioned the government small business loan as a prime source of financing for the cost of your franchising proposal. This loan actually maxis out at $ 350,000.00 but in our experience that amount finances a huge amount of the franchise opportunities in Canada. They are great loans because they offer sensible maturities of 5-7 years, solid interest rates and nominal fees attached to the overall financing. The initial franchise fee itself is not financeable under the program, so typically our clients fund that portion themselves, which of course counts as their overall equity,

It’s important to start sourcing your financing for your new franchise early on in the process. The bottom line, it’s never too late to start looking at your financing options available, including our aforementioned SBL loan.

So where does the capital come from relative to your own investment in the business.

Typically we see these funds coming from a clients own personal savings. That might also come from a severance situation based on the clients exit from ‘ corporate life ‘. In some cases you may choose to collapse savings, registered, or otherwise.

We encourage customers to understand the concept of financial leverage when it comes to R O I, or return on investment. Measure risk against reward; ensure you can withdraw a reasonable amount as a salary from the business, based on your financial projections.

And that ROI! Compute and analyze it just as you would any investment, such as a stock. Let’s say something costs 100% and you earn a 6% dividend. That’s generally a reasonable amount. So if you sell that investment 12 months latter your ROI is 6%. Think of that stock as being your business and the dividend being your business profits. Measure risk and reward and factor in the time and commitment you need to make into the business.

Franchising financing in Canada can be as difficult or easy as you make it. Speak to a trusted, credible and experienced Canadian business financing advisor who is expert in financing the cost of your franchising. And here’s to your great, hopefully, Return on Investment!

related issues

By maryrose feil

 Their new business is started by many newer franchisees after purchasing their franchise business opportunity only to find almost an infinite number of regulations and a procedure manual filled up with the “exact” and proper way to accomplish things. There will be no deviation and therefore, the franchisee miracles how all this will help him make money, since it appears following all these rules does just cost him money, actual money, and he acquired the franchise to make money not produce organization losses.Thus, the newest franchised store owner asks; “Will following all these rules and remaining in conformity of the franchise agreement by focusing to detail in the private operations manual basically help my franchise to great profits? And if that’s the case, how do I know this?”This is definitely, a good question, and you will find really a few responses. Number 1, you “must” follow the franchisor’s business plan, as agreed in the franchise contract or be terminated for cause and probably lose every thing. That’s the most important position, but I would ike to give you a softer side.The franchisor is continuously increasing their business design from actual procedures of 100s and sometimes 1000s of stores, they know what works and why. Failure to follow the “Best” way which has been documented and established will produce reduced effects in profit.Next, you should recognize that the franchising company wants as they get royalties, which are usually in a primary ration to your product sales money to be made by you. They want you to succeed and generate income. Because the more money you ingest, the more money you’ll produce, the higher for you and for your franchisor. Therefore, please consider all this.

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