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For entrepreneurs, buying a franchise can be lucrative.
An entrepreneur who invests in an established restaurant or ready-to-wear chain, for example, immediately benefits from the brand's notoriety. A franchise offers you a source of income thanks to an established customer base and the sales and marketing support provided by the franchisor. So you don't have to struggle too hard to keep your start-up business alive.
However, buying a franchise also entails certain risks and can lead to poor financial returns or, in the worst case, economic failure.
One of the key success factors in buying a franchise is obtaining the right amount of loan to launch your business, while benefiting from the best possible interest rates. Whether you're investing in a franchise or launching a new business, you need a strategic approach that includes evaluating different financing options.
Understanding risk
Very often, we've noticed that the main motivation for entrepreneurs buying a franchise is that they're blinded by their dream of running a business.
They then fail to put in place a prudent, calculated financial structure that will enable them to get their business off to a sound start.
Promoting the success of your franchise
Here are some essential tips for buying a franchise:
- Determine total purchase cost
The price of a franchise does not include the working capital you'll need to get it up and running. Entrepreneurs often run out of cash just a few months after buying a business.
This brings us back to the cash flow we've often talked about, but once again, cash flow is the key to the success of your new business.
Many franchisees fail because they didn't include sufficient working capital in their project costs.
So when you apply for a loan to buy your franchise, it's worth including sufficient working capital. It's a good idea to look beyond the loan interest rate and consider other factors that will help protect your working capital.
For example, can you defer capital repayment to take time to get your franchise up and running?
Don't hesitate to ask someone to help you calculate the cash flow you'll need, as this is an important series of data that requires the support of competent people.
- Compare offers
It's a good idea to consult different institutions about your financing needs. You could benefit from advantageous terms and conditions, and diversify your sources of financing to reduce risk.
It's no secret that in Israel's banking sector, it's all about competition. It's true for real estate loans (Mashkenta), but it's also true for starting up your own business.
- Understand the terms of the contract
Franchise agreements can vary widely from one franchisor to another. It's vital to know who actually holds the lease on the premises occupied by the franchise, and what the repayment, royalty or revenue-sharing arrangements are.
Pay particular attention to clauses relating to your company's results, as these are designed to protect your interests.
As a franchisee, you need to understand the terms and conditions of both lease and franchise agreements. The franchisor can sometimes take back the license if you don't meet specific sales targets or requirements.
- Assess your ability to invest in the company
It's good to save for a down payment and to have cash on hand to ensure initial cash flow. However, it's just as important to be able to inject capital into the business if sales aren't as good as expected, which is often the case in the early days.
You need to have money to spare, whether it's your own assets or reserves in the bank. The key is to have access to sufficient funds.
- Prepare your documents
Financial institutions usually require a draft of the franchise agreement, the franchisee's personal balance sheet (including net worth) and a business plan.
Once the business loan has been approved, entrepreneurs should not hesitate to seek help in operating their franchise.
It is therefore essential to benefit from the support of a firm of experts during the first months or years of franchise operation.
