How you structure and finalize your financing for your franchise will have a dramatic effect on your overall success, as we are talking about ability to repay debt, build your personal net worth, and limit your personal financial liability to the extent that you can. A key document in both assessing, and of course completing your financing is the business plan. Careful thought and preparation must go into this document as it will reflect the financial success of the business, and it should also focus on the only thing the lender cares about – how will financing be repaid? If you can’t demonstrate a viable repayment model then your financing is potentially at risk.

Some studies in the U.S. indicate a very high rate of financing declines (80%) for the sole reason that the franchisee or new business owner was simply unprepared and could not demonstrate the overall financial success. Your franchise financing planning should therefore reflect the royalty rates based on your sales, your repayment of any term debt, and the potential need for working capital. If you are in a ‘ cash business ‘ as many restaurants are you have a limited need for working capital, and typically a small over draft will suit the firm quite well. However if you are selling on credit terms for any product of service you need to factor in a working capital component in your franchise business plan to reflect the carrying of receivables and inventory, we’re discussing your financing needs for the franchise, and it is worth mentioning that by now you should have reviewed the franchisors financials they have provided to ensure the franchisor is in a viable financial position.

Your franchise financing goal should be to structure a financing that properly reflects the opening and on going financial needs of the business. This typically is done with the assistance of specialize loans such as the CSBF loan program, equipment financing pertinent to your business needs, a working capital term loan, and a line of credit t and or business credit card.

So you fancy a franchise eh?

You like the sound of the whole ‘in business for yourself, but not by yourself’ thing. You’ve done your research and you reckon you can see the way ahead. You reckon your future lies under the banner reading ‘Franchise’.

Then you come up against the $64,000 questions…

1) How much will it cost?

2) Can you afford it?

Now if you are at all human you will have done what every prospect on the path to making a purchase of any sort does. You will have pictured what it will be like to own that franchise. Which is perfectly understandable.

BUT

You are also laying yourself open to the biggest mistake that prospective franchisees can possibly make. You see you can be in danger of letting your judgement be affected by a fatal affliction that is the cause of huge misery in many walks of life, but especially in Franchising. That affliction is

OVEROPTIMISM

Even the most level-headed individual is prone to it from time to time. Most of the time you get away with it, but in franchising there are several things that make this a hugely dangerous problem. That’s because of the following points:

1) The prospective franchisee (You?) is often not experienced in the world of small business finance, so they are leaning heavily on others to provide that experience. The major supplier is frequently the franchisor. A person or company who has a different agenda to you. They want to grow their business and while they don’t want you to fail they are certainly more willing to risk your future they you might be.

2) You may not be experienced in finance and cannot pull together a cash flow forecast.

3) You may know exactly how much you’ve got to spend and believe that it ‘should be enough’.

4) Your optimistic assumptions are based on doing as well or better than others already in the field.

5) You haven’t factored in what you really need to live on. What will see you on the short road to bankruptcy is a failure to recognise that these problems have to be acknowledged and dealt with. Optimism will mask these unpalatable facts sometimes until it is too late.

So to avoid disaster:

1) Create several cash flow scenarios. Yes, be optimistic, but also be neutral and pessimistic too. Then look at the pessimistic forecast. Now be even more pessimistic. Can you afford to fund the franchise and yourself at that rate of proft?

2) When you think you’ve covered the options take your thoughts along to a friend or somebody who’s opinion you value and who you can trust to give you their real thoughts rather than what you want to hear. Tell them you need to check the reality of the deal.

3) Take your proposition along to a local accountant or book keeper. They will give you their advice for a fixed fee and it needn’t cost the earth. If you are worried about the cost, try to compare the cost with the amount of money you could lose. I suddenly looks a little better doesn’t it.

4) When you are lying in bed in the still of the night ask yourself if you are really sure that the numbers stack up. Are you really certain that you are being realistic rather than optimistic.

5) Take another look at the numbers that the franchisor is giving you as an example. Ask yourself exactly how you are going to replicate the numbers that they are quoting. If they are suggesting that you can make quarter of a million in the first year, ask yourself whether you can really make that money – where are the customers coming from in the real world rather than on paper.

6) Look again at the assumptions you are making and decide what would happen if the assumptions were slightly out? Would it be a disaster or would it be OK.

Finally make sure you do every bit of research you can think of, and get a really good guide to help you create the structure for your investigations. You may want to consider my book – www.realworldfranchising.com. It covers all of these items in more depth and a lot of others too.