Keen to run your own business? Here are some considerations for prospective franchisees.
Published 18/04/2016 | 12:05
Ulster Bank has many years experience of working with Franchises in the Irish market.
Mark Pentony, Senior Manager, Business Direct, Ulster Bank, talks you through what you should consider if becoming a franchisee is of interest to you.
Franchising basically involves buying the right to replicate a business model, already developed and proven by the owner (the Franchisor).
For those a bit daunted at the idea of starting a business alone, buying a licence to run a business, from a well established Franchisor, can make the transition from Employee to Business Owner a little easier.
The right franchise should equip you with tools of business to compliment your own personal abilities such as:
- A well-developed business concept
- A product or service people want
- A blueprint for how to run your own business
- Training on how to run that business
- Guidance from a management team with expertise in running a business.
Franchisees (you) get the right to use an already proven business model in a new territory. At the same time, you become a business owner with all the benefits, responsibilities - and risks - entailed.
What should I consider?
There are a few key things you need to consider at the outset:
- Does running your own business appeal to you? Are you ready for the commitment of time, effort and personal resources?
- Is franchising right for you? Are you prepared to follow the franchise blueprint that has been successful for the franchisor, and are you agreeable to the terms and conditions of the franchise?
- What kind of franchise should you choose? One that suits your interests, personality, local market and pocket. As with any investment, do take independent legal and financial advice before signing the Franchise Agreement.
- What should you look out for in a franchise? A documented franchise, with franchise agreements; a proven track record of success for its existing franchisees; a satisfied, profitable network of existing franchisees; a full range of business support structures provided by the franchisor as part of the franchise package; a track record of product and service innovation in the franchise. Talk to existing franchisees to sense-check your expectations.
- What personal funds I have to invest in my franchise? You will be expected to invest personally in the purchase and set-up costs for your franchise, these will vary from franchise to franchise, but you can expect to invest one third of the set-up costs, and have funds available to cover your costs during the set-up period of time before you are “earning” from your new business.
- How can I fund the rest of my franchise acquisition and set-up costs? In addition to your personal cash investment, Franchise acquisition and set up costs are typically funded through a mix of bank debt, asset finance and perhaps some Franchisor funding support.
- I don’t have the cash I need to invest in the business! Your franchisor and your bank will typically expect you to invest cash in the business, but if you are looking at buying a franchise for less than €25K, Microfinance Ireland www.microfinanceireland.com may be able to assist.
Have a business plan
Your business plan will be key to your successful application for bank debt. It should include a cash flow projection, which will outline how much cash the business is expected to generate. Your cash flow projections should be sensitised to show what could happen if the business is slower to get off the ground than you anticipate, or if costs are higher than you expect.
When banks consider a request for finance – whether it is a proposal for franchise owner finance or for a stand-alone business – they typically focus on five fundamentals – ‘the 5 C’s’.
• Character: The borrower’s personal experiences that point to their track record of commitment to activities they have been involved in.
• Capital: The spilt between equity (the money put in) and the debt (money borrowed)
• Collateral: The security given to the bank for protection of the loan
• Condition: The assessment of the current economic market
• Capacity: The ability to repay the credit facility
The involvement of a well-established, reputable franchise, which has a proven track-record in opening and operating successful, profitable franchise owner outlets, can offer comfort about the capacity of the new franchise outlet to make enough money to repay the credit facility.
Developing a business plan will very much be a collaboration between the prospective franchise owner, his/her financial advisors and the franchisor, who can provide guidance on the business assumptions used, based on the performance history of other franchise owner outlets in the franchise network.
Mark Pentony is Senior Manager in Ulster Bank’s SME (“Small & Medium Enterprise”) Division. His contact details are: Mark.Pentony@UlsterBank.com, 087 2203166