Financing a Franchise

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Financing a Franchise
Rolene Govindasamy Manger Franchising
March 2009
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Characteristics of a financially sound business

• Cash flow
• Working capital cycle
• Breakeven
• Margin of safety
• Seasonality

• Transferable value
• Retained equity
• Future profitability

• Profitability
• Sufficient margins
• Sustainability

• Return on Investment
• Mutually beneficial
• Pay back period

• Stability
• Sound balance sheet
• Track record

• Debt structure
• Debt to equity ratio
• Working capital
• Capital expenditure
• Affordability

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The different stages of a business

• How do I grow fast enough?
• Will I grow with cash I generate or do I look
  for finance outside the business?
• Where do I get the finance for growth ?

Take-off or Finance Phase

• Understand operating ratios of industry
• Manage your expenses accordingly
• Increase sales to stay in business
• Cash flow needs to be enough to break even and
  managed to finance growth of the business

Survival or Cash-flow Phase

• Can I deliver my products?
• Can I expand my customer base?
• Do I have enough money?
• Insufficient information on how to run a
  business, how to develop a business plan, how to
  access finance

Start-up Phase
6 Months
1 - 2 Years
2 - 5 Years
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Sources of finance

• Personal savings Primary source for most
  business world wide
• Family and friends Often cheapest source because
  it is loaned at a low interest rate, which is
  beneficial when getting started Make sure
  they know what they are getting into they
  have to know the risks
• Bank finance Most likely source of borrowing
  apart from family You have to be able to
  show that your business is viable and
  bankable Business plan and cash flow
  projections
• Management need to convince bank that it has
  the skills and expertise to manage the
  business risks and repay the debt
• Equity finance Mostly for growing or expanding
  business
• Disadvantage you have to give equity /
  partial ownership
• Criteria
• 1. Experience and abilities of
  owner/management
• 2. Industry, product / service offering,
  market opportunity
•    3. Growth of the business
•       4. Return on Investment

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What Standard Bank offers
The biggest issues for a business from a banking
perspective, whatever the stage of the
business, are the management of cash flow and
access to working capital Your bank should
provide you with convenient transaction
capabilities and online banking access. The
Business Current account is Standard Banks
core banking product. The account is linked to
a Business AutoBank card, which can be used for
electronic banking and as a debit card. It
enables the use of all transaction channels In
terms of working capital, your bank needs to
provide you with the right level and type of
finance. Choosing the right kind of business
finance is like choosing the right man for the
job. In the same way it is not only silly to use
an overdraft to buy a car, for example, it's
risky
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Loan application assessment criteria

• Financial
• Owners contribution
• Realistic projections
• Debt carrying capacity
• Assets

• Security
• Tangible collateral
• Intangible collateral
• Personal assets

• Management
• Profile of entrepreneur
• Management, financial
• and marketing skills
• Technical qualifications

• Environment
• Industry risk
• Location
• Competition
• Entry barriers

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The right finance...
What you need the money for
? Optional
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Empowerment funding

• Khula Indemnity Scheme applicant lacks security
  
• South African citizen
• Owner managed
• Operate within South Africa
• Minimum 2,5 to 10 own contribution - unborrowed
• Demonstrate financial viability and repayment
  ability
• Access to skills and expertise
• Khula Lending criteria
• Cash margin of safety
• Ability to carry debt within franchisors
  criteria
• Mentorship
• Covers up to 90 of R3 million loan at maximum
  interest rate of prime 3 p.a.
• Annual indemnity fee payable of up to 3 of the
  loan amount

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Do I invest in a new or existing franchise?
Advantages
Disadvantages

• Proven business format
• Branding
• Benchmarking
• Turnkey operation

• Ramp-up costs
• Unpredictability
• No track record

New franchise

• Immediate cash generated
• Established customer base
• Existing infrastructure
• Market presence

• Price premium - Goodwill
• Hidden problems
• Declining market
• Staffing problems

Existing franchise
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Some key questions to ask a franchisor

• Are they members of FASA?
• Disclosure Document updated?
• Creditworthy and reputable brand?
• Period of operation and success factors?
• Number of existing company and franchised
  outlets?
• Number of terminations and why?
• Can existing franchisees be contacted?
• Is the franchisor accredited with financial
  institutions?

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Due diligence on existing franchise...

• Financial statements and management accounts
• Asset register
• Banking account details and historical statements
• Tax returns
• Sales and purchases records
• Inventory receipts
• Supplier contracts
• Company documents
• Shareholders consent
• Payroll and employee benefits

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The Business Plan...

• Complete a winning business plan
• assisted by franchisor
• test assumptions
• own analysis
• living document
• decision making tool for management
• Go to www.standardbank.co.za
• Business
• Starting a business
• How to draw up a business plan

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Contact us

• www.standardbank.co.za
• Business
• Franchising
• Standard Bank Franchise Desk
• Email Franchising_at_standardbank.co.za
• 011 636 6573
• Franchise Association of South Africa
• www.fasa.co.za
• 011 615 0359