Franchise Funding in difficult economic times

Franchisors, franchisees and their franchise bank denote a partnership to drive franchise industry growth. In this difficult economic time I kept being asked questions like “do banks still lend at all”, “is it still possible to lend against the business” and “what is Westpac’s position regarding franchise lending”?.

The economic environment have changed dramatically, some would say have gone back to economic fundamentals, and it keep changing daily. New economic realities are now being accepted, here and around the world, and developments overseas do influence the relatively open New Zealand economy.

Good News

One cannot ignore the the economic realities, but there are a few positives for the broader franchise community.

Some good news for instance for retail/food franchises is that rents may be coming down, good sites which was impossible to find a year ago is becoming available, landlords have been known to offer fit-out contributions and funding costs dropped almost by half.

For food and coffee outlets – some food cost increases may have peaked and sales for some fast food groups actually increased year-on-year.

The profit multiples that existing businesses sell for have also been dropping, creating opportunities for new franchisees and considerably lessening the pressure on franchisors to support overprized franchises being on-sold.

The franchise business model and risk

Sales have been under pressure in many businesses during the last year, leading to more conservative assessments and more realistic cash flow projections. This, together with the factors mentioned above have now led to a situation where the main drivers of the franchise models for many systems are better supported. Paying a realistic rent that work with the franchises model, lower funding cost, more realistic sales expectations and hopefully going forward the availability of better quality franchisees open up opportunities for sustainable business growth for franchise systems. This may also lower the risk presented to the business owner (and the bank).

Franchise funding

Finally the bank can only support the franchisor (and franchisees) growth if it understands the risk and success factors driving the business and the model of the particular franchise. We are more than happy to continue to support the growth of franchise systems in New Zealand.

1. For franchisors and franchise accountants this mean working closely with the bank to provide the information that make it easy to support franchisees going forward.
2. Address the business fundamentals – if this stack up the business would present a very good risk (after all it is making money vs. some speculative property investments at the moment)

For the potential franchisees:

• Assess risk properly
• The bank (and business owners) will be looking a lot closer at the figures presented.
• Business fundamentals and understanding the particular businesses model more important than ever.
• Do the numbers (with the right advisors) to convince yourself
• The more information you can supply the easier it will be to get finance
• More opportunities with better fundamentals (like rent, funding cost, locations etc.) may be available in your chosen industry.
• Do not overpay for existing businesses – their profitability may have dropped a lot in the last 6 months and the risk premium would have gone up as well, meaning lower prices are being paid for small businesses.

The Westpac franchise team continue to support the industry and fund potential franchisees and our local franchise business managers around the country are ready to add value for franchise finance customers.

Disclaimer: This article is not an economic review and only addresses a few issues that typically influence franchise businesses. The views and opinions expressed in this article belong to the author and do not necessarily reflect those of Westpac. The information contained in this article is intended as a guide only and is not intended as an exhaustive list of matters to be considered. Persons entering into franchise agreements should seek their own professional advice.