By Noha Shaheed – Journalist, Cirrus Media

Falling short of the capital investment required for a franchise is often a dream killer for buyers. But does it need to be? We explore how you can buy a franchise with little or no money in hand.

When seeking finance, review your options and stress test the numbers.

While an individual’s suitability for a franchise model can be a deal breaker, more often than not, the capital investment required to buy-in can also be the culprit. Most hospitality franchises alone come with a six-digit upfront price tag.

So can you buy a franchise if you have no money in the bank?

James Scurr, managing director at CFI Finance says it can be done, but isn’t really looked favourably upon.

“We refer to ‘hurt money’,” this is normally cash savings contributed by the franchisee to the set-up of the business.

“If a franchisee has no capital ‘at risk’ in the business then it is too easy to walk away from the business if things get tough.”

Darryn McAuliffe, CEO of FRANdata Australia says that it’s almost impossible to buy a franchise with no money.

“Apart from the right to carry on a business using the franchise ‘system’, initial franchise fees are generally required to offset the costs of recruitment for a franchisor and initial training of the new franchisee,” he explains.

However, potential buyers who have some capital, but not enough for the full cost of the initial investment may be able to get around it.

Scurr says it is not uncommon for someone who has some savings to contribute to work with a bank or lender for the remaining money.

And there are processes in place for this type of finance.

“The acquisition can be sometimes be completed by borrowing against other assets or the equipment of the business,” says McAuliffe.

“A number of brands also have formal lending programmes in place with banks and other lenders which allows borrowing against the value of the franchise business.”

 

So is it a good idea to seek finance for a franchise?

This could depend on the individual.

Scurr comes from a background as a franchisee in the hospitality space, and he understands the importance of using finance to ensure there was enough capital to grow the business.

In his view, using every cent he had to pay the initial investment would not leave enough for the expenses required in the first three to six months of operating the business.

“Also, the tax benefits associated with finance in business are a great bonus,” he adds.

And it’s important to know what you’re getting into if you choose to seek finance.

“It is essential that applicants fully understand the terms of any finance being provided and are realistic in the planning they undertake to ensure those obligations can be comfortably met,” says McAuliffe.

“Lack of capital is a key cause of small business failure and potential buyers should take great care before trying to enter into a franchise arrangement with insufficient capital,” he advises.

Revise your expectations
If your funds are severely limited it’s worth considering if another option would be more suitable – holding off an investment until you have the money to hand or choosing a minimal-cost franchise option for instance.

If you decide to go ahead, it’s important to be realistic about expectations when seeking finance options. These include taking a small bank loan or family funds. Some brands have pathways to attaining finance.

Bakers Delight offers a Kick Start franchise program.

“The barrier which many of our prospective Gen Y franchisees face is access to finance, both for training and to purchase or lease a bakery,” says Julia Hewagama, franchise recruitment manager.

“To overcome this finance barrier and to support our network talent we introduced the Kick Start Franchise Program which is an internal pathway to franchise ownership.”

The program covers the same modules that external candidates complete, however, it allows for the trainees to maintain their full time employment within our network, whilst completing the program over a longer duration of time, typically between six to 12 months.

The program also requires a financial commitment from the Kick Start trainee which is held as a deposit and upon successful completion of the program the deposit goes towards their bakery purchase. However, Bakers Delight does look at their candidates’ financial capabilities before starting the program to ensure that upon completion, they have the minimum finance required for working capital.

And if candidates don’t have enough finance after the program?

“They may be in a position to lease a bakery from a multi-site operator’s portfolio at the end of the program,” explains Hewagama.

 

What you need to take away

 

• Going into a business under-capitalised is a risk, so be realistic about your cashflow projections, review your options and stress test the numbers.
• If it is more suitable for you to have the capital investment in hand, working as an employee of a brand where you would like to buy a franchise may be an option.

Read more at www.franchisebusiness.com.au