Buying an Existing versus New Franchise
flow available through some franchise business models, and create lending offers accordingly. This means that in some instances, banks may be prepared to lend 50 per cent or more of the value of a loan without real estate security (typically the franchisee’s home) if they are buying into a brand that has been accredited. Accreditation does not apply to all brands and specialised franchise lending is not offered by all banks. In general, franchises with an investment level under $150,000 are unlikely to qualify for accredited lending packages. This means that it may be easier to raise a loan to buy some greenfield franchises than for others. Similarly, for those existing franchises which are part of accredited systems, raising a loan should also be easier. But where the system is not accredited, a bank will look at the real estate security offered by the borrower, and the existing cash flows of the business in making its lending decision. If potential franchisee does not have enough equity in their home or other real estate security, the loan may depend entirely on whether it is an existing business that can demonstrate a trading history. In this instance, a bank could be more likely to lend to a buyer of an existing franchise, rather than the buyer of a new one. However a loan just to buy the business may not be enough if the business has old equipment or outdated inventory, software, corporate image, etc, so the buyer must have access to reinvestment capital. This can be very difficult to raise after the purchase, and is best taken into account with the initial loan to buy the business. The problem is that unless the buyer is an expert in running this kind of business, they may not be fully aware of all the upgrade costs required until after they have already bought the business. On the other hand, buying a new franchise means that everything is new from the start and does not need to be replaced or upgraded for a much longer time (possibly even for the whole initial term of the franchise), and therefore the buyer should not need to raise reinvestment capital at the same time as buying the business. The final capital consideration is working capital. An existing business that is already generating cash would be expected to require less working capital (depending on the nature of the business) than for a new business which will need to build up its cashflow from a standing start in order to pay its bills as they fall due. (This may not always be the case, particularly for businesses where goods or services are sold on credit, and the working capital required may actually be greater than for a new franchise). 37