4 easy steps to financing a franchise

Throughout the process, it's important for everyone to be honest
and up-front.
Annie Bourque | Journalist

Buying a franchise? Look no further for some helpful financing advice! 

Claudine Boucher, Account Manager at the Qu├ębec-Capitale Desjardins Business Centre, helps turn dreams into reality for people who want to start their own business. 

The first thing she does is warn potential investors about the kind of wishful thinking often associated with this kind of transaction: "Some people think they're buying a salary and job security. But it's not that simple!" 

Step 1: Understand what's involved
A business plan demonstrates your understanding of the industry and the challenges it entails.  Franchises come in all shapes and sizes: pharmacies, supermarkets, eyewear retailers, etc. Choosing the right kind of franchise and understanding the industry are key to your success. 

The business plan also includes conservative 3-year financial projections. "It's important to be conservative with your projections. That shows you're a serious investor." Don't hesitate to scale back your projected revenues by 5% and increase expenses by maybe 2 or 3%. 

You also need to identify your competitors and explain what sets your franchise apart. 

Ms. Boucher recommends reviewing the information provided by the franchisor in detail. And don't hesitate to ask questions: "It's a good idea to talk to other franchisees about their own experience along the way." 

Questions to ask: 
  • Can I count on the franchisor for assistance?
  • Do they offer marketing support?
  • Were they flexible during your first year in business?
  • Did you achieve your projected sales?

Throughout the process, it's important for everyone to be honest and up-front. It's like anything else in life. You want to get to know your partner before you marry them. 

Step 2: Get your finances in order
Draw up a summary of project costs and funding, including where the funds to purchase the franchise and buy the equipment and/or real estate will come from. As Ms. Boucher explains, "financing is in the form of a term loan with an amortization period that varies based on the useful life of the asset...between 3 and 10 years for equipment and up to 15 or even 20 years for commercial buildings." 

In some cases, a line of credit can be set up to fill the gap until money starts coming in. 

The downpayment will vary based on the percentage of financing available, which is directly related to the asset being financed. "For example, commercial properties are eligible for conventional financing of up to 65% and up to about 75% for equipment. There are also government guarantees that allow you to get financing of up to 90% for the purchase of equipment or real estate," she explains. 

Some people question the importance of a downpayment. A downpayment demonstrates that the business owner is sharing the risk of the project with their funding partner. "The initial downpayment might come from family or friends. But it's important to show the funding partner that the business owner has the ability to inject their own equity into the project if need be." 

Having sufficient working capital up front will enable you to cover unexpected expenses and contribute to the sound management of the company's liquidity. 

Step 3: Hire a team of experts 
Before buying a franchise, Ms. Boucher recommends hiring a team of experts: an accountant, a lawyer and a notary. "Don't use the franchisor's people. In this kind of transaction, it's important to get advice from neutral parties."

These experts will help you understand the complex wording in the franchisor/franchisee contract. 

Step 4: Know your limitations 
"Every business owner has their own strengths and weaknesses," says Ms. Boucher. You might be an excellent salesperson but have a hard time managing employees. That just means you need to hire someone who specializes in human resources.  Understanding your limitations and hiring the right people are key to ensuring a successful business.

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