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Buying into a franchise

Written by Nigel Toplis on Thursday, 04 March 2021. Posted in Finance

Business expert Nigel Toplis gives you the inside track on purchasing a franchise.

Buying into a franchise

Buying into a franchise

Business expert Nigel Toplis gives you the inside track on purchasing a franchise.

The first thing all budding franchisees need to calculate is how much money they think they will require during the early months of their business. Obviously, there is the initial fee (plus VAT) which needs to be paid. But it’s also vital to have ‘working capital’ and it is my recommendation you have three to six months of cash available. It may be that you can utilise savings to cover part of this necessary fund, or perhaps all of it, although most new business owners usually require a bank loan of some kind.

This ‘working capital’ ensures you have the funds at your disposal to help your business through its early growing pains. And there is certainly ‘no value’ in under-funding the business from day one. Neither should you stretch yourself to purchase a franchise you can’t afford. While the banks are keen to lend to the franchise community you, as the franchisee, will also be called upon to invest some of your own money. 

To this end it is important that you have liquid funds available and that you do not overstretch yourself. I can’t help stress this enough. Contact at least two banks. Your franchisor should be able to give you details, and perhaps a name or two as well. 

The franchisor may also be able to arrange the meeting for you, so you can chat to their franchise specialist. Most established franchise companies will have already negotiated funding arrangements with major banks, aimed at creating a smooth passage into business for new franchisees. Several banks have specialist franchise departments to deal directly with prospective new business owners.

In addition to the banks, there are other lending institutions keen to lend to members of the franchise market. These include The Start-up Loans Company and, once again, your franchisor should be in a position to supply contact details.

Yet again I will say ‘do not overstretch your finances.’ While franchises have an excellent record of success, no-one can forecast certainty in the world of business. But you do require a safety net of cash during the early months of trading. You will need to be honest with your franchisor about the source of the money. 

There is no point telling the franchisor that you’ve got a certain amount of savings in the bank when, actually, you’ve taken out a personal loan with high interest charges. If the franchisor doesn’t know your circumstances, then they can’t help or advise.

However, one of the main advantages of franchising is that banks generally take a more favourable view of the borrower, than someone starting up on their own. For an independent start-up, banks will usually lend up to 50% of the total cost. But for an established and proven franchise, this figure normally rises to 70%. Terms and rates do vary between banks although, in my experience, they all need to be competitive in this tough business age.

That said, you can’t just walk into a bank and walk out with a loan. There is always a rigorous process and the bank will want to be assured of your commitment to the business. They will also require proof of your assets.

When attending a meeting with a bank official or potential loan provider, presentation is the key. Prepare a clear and solid Business Plan and present yourself as professional, committed and ambitious. This will certainly make a huge difference. And a good franchisor will help you to prepare your Business Plan.

About the Author

Nigel Toplis

Nigel Toplis

About Nigel Toplis: Is managing director of four franchise businesses: Recognition Express (badges, signs and promotional gifts); ComputerXplorers (provides ICT educational classes for three-to-13 year olds); Techclean (a leading provider of system hygiene services to businesses in the UK); and Kall Kwik (a licenced operation and premier business print and design company in the UK). Nigel is a past chairman of the BFA, has written three books on franchising and, in 2007, became a Fellow of Lancaster University.

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