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buying a franchise: financial matters

FUNDING YOUR FRANCHISE Westpac’s Daniel Cloete offers advice on some common banking issues for franchisees


hether you’re starting-up a new outlet or taking over an existing one, as a franchisee you’ll face a number of opportunities and challenges on the financial side. That applies both to start-up funding and to dayto-day operations, so it’s worth educating yourself on the most common issues in advance. That way, with the guidance of your franchisors, your accountant and your franchise-specialist banker, you can focus on building a truly successful business.

funding issues According to the 2017 Survey of Franchising (see page 6), franchisors identified a number of franchisee funding issues as being of most concern. The biggest problem regarding growth funding, identified by 59 percent of franchisors, was lack of equity from potential franchisees. (equity is money you put in; funding is money you borrow). This means people who otherwise meet the ideal criteria for new franchisees not having sufficient equity to invest, or the business not being able to service the debt required if appropriate security is not available.

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About a third of franchisors also identified as key funding issues problems with: • accessing funding • a lack of understanding of franchise models amongst some lenders; • (lack of) access to cash flow lending. equity and debt servicing Most people buy businesses using a combination of equity and funding. Unfortunately, if you don’t have a sufficiently high proportion of the required funds as equity, you may have to look elsewhere – perhaps start with a smaller business and work your way up. You see, although it’s perfectly normal to borrow money to fund your way into business, you should only borrow to a level your business can afford. Neither you, nor the bank, nor the franchisor will be happy if you incur more debt than the business can service. The amount of equity you need for any franchise may depend on the proposed funding structure. For example, if you are using a house as security, a longer term would be possible, thereby reducing the debt servicing amount. Where funding is secured against the cash flow of the business (see below), the length of the franchise agreement or lease terms may limit the funding term – increasing the regular servicing requirement. Equipment finance can reduce the level of upfront investment required, but the appropriate funding term would vary according to the useful working lifetime of the vehicle or equipment. No matter how attractive a longer term may seem at first, you don’t want to go on paying for a coffee machine three years after you’ve had to replace it with an even more expensive one. accessing funding The best way to access the funding you need is to work with a specialist franchise specialist banker who understands the business model of the specific franchise you are looking at. They will know what’s realistic and be able to make suggestions based upon your own particular situation. They may also be prepared to offer some cash flow lending against the strength of the franchise brand and business model.

Time to try something new! We have been successfully operating since 2003 in Christchurch, and we are about to unleash ourselves on the rest of New Zealand. If you want a franchise then look at something new, LOOK AT NEW YORK DELI! Spend some time over a leisurely coffee and talk to our existing franchisees. You will be pleasantly surprised. Or you could call our associate company to discuss franchise options: 021 955 834

Then call Michelle 0274 331 266 to have a chat.

Making the call could be the best thing you've ever done


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Franchise New Zealand

Spring 2017

Year 26 Issue 03

7/09/17 3:55 PM

Profile for Franchise New Zealand

Franchise New Zealand - Year 26 Issue 03 - Spring 2017  

A new survey has revealed that New Zealand has 631 different franchise brands, 37,000 franchised units and our franchises employ 124,200 peo...

Franchise New Zealand - Year 26 Issue 03 - Spring 2017  

A new survey has revealed that New Zealand has 631 different franchise brands, 37,000 franchised units and our franchises employ 124,200 peo...

Profile for paul52