Franchise Finance : Franchise Help and Expert Advice from Mark Scott

Mark Scott joined the NatWest Franchise section in 1998 as Senior Franchise Manager and was appointed as Head of the team in December 2002. He joined the bank in 1982 and has a wide range of experience within the small business sector and has managed relationships with national organisations, such as the DTI and Business Links. More recently Mark has been a regular speaker at seminars for prospective franchisees and franchisors, including The Franchise Alliance and the BFA.

10 things to discover before buying your franchise
Mark Scott (National Franchise Manager - NatWest)

1. Take a critical look at your strengths and weaknesses – are you sure you have the capacity, temperament and skills to run your own business? Marketing and selling skills are becoming more important in running a franchise.

2. Make sure you have the full support of your family – the additional responsibilities and demands on your time will inevitably cause some strain.

3. Choose some existing franchisees to talk to – don’t just speak to those recommended by the franchisor – and ask how their business is performing and what support and service is being provided by the franchisor.

4. For new franchisors, check they have run a pilot, how long did it operate, is it still trading and what has it achieved in financial terms? If no pilot was operated, how does the franchisor know the franchise and therefore will you be successful?

5. Examine how well known the franchise and its service/product are. A good reputation is a head start in business.

6. Look at the market as a whole – find out who your competitors are and how strong their position is.

7. Examine costs closely, in particular the franchise fee and monthly management fee, and whether they are reasonable and value for money; will the margins be sufficient to support the business after payment of regular fees to the franchisor? As a guide, the average franchise fee is £20,000, although this is skewed in view of a small percentage of higher figures. Ongoing fees average 11.4%.

8. Is the training provided by the franchisor sufficient to enable you to run the business successfully?

9. Seek professional advice from an accountant about income and profit projections and from an accountant about income projections and from a solicitor about the legal agreement. Both should have a good understanding of franchising and preferably be affiliated to the British Franchise Association.

10. Talk to the NatWest Franchise section about the financial aspects of running a franchise and ask them to put you in touch with your nearest area franchise manager. You should also contact the British Franchise Association.

Raising Finance to buy a Franchise
by Mark Scott (National Franchise Manager - NatWest)

Raising finance for a franchise is not as daunting as it may seem. Most of the main banks have a dedicated franchise section only too willing to provide finance for the purchase of a franchise, although it should be noted that it is the individuals that they assess, rather than the franchise.

People are generally able to borrow more to establish a franchised business than they would for a conventional start-up venture. All the banks recognise that franchising is usually a safer way to get into business and, for established and proven franchise systems, they are prepared to lend, subject to status, up to 70% of the start-up costs including working capital. For a new, or less established franchise, this figure is nearer to 50%, much the same as a conventional business.

Typically the borrowing will be taken as a fixed rate loan repayable over a term no longer than that of the franchise agreement.Variable rate loans are also available if you want to gamble on interest rates. Some of the borrowing could also be taken as an overdraft to provide an element of working capital. Certainly the VAT element of any franchise fee is normally funded by way of overdraft until it is refunded by HM Customs.

The types of lending discussed so far are normally arranged at local Business Centres and security for any borrowing may be required.Security is usually provided in the form of a second mortgage over property but could also include a charge over surplus cash, insurance policies or stocks and shares. If there is no security available the bank can look for a guarantee, up to 75% of the amount borrowed, from the Department of Trade and Industy’s Small Firms Loan Guarantee Scheme. The remainder is considered as unsecured borrowing.

Where vehicles or equipment are required for the franchise these can be financed under a lease or hire purchase agreement. Some franchisors will have facilities in place with known companies assisting with this type of finance, such as Lombard Business Finance.

The rates on any lending can vary depending on the contribution, security and track record of individuals.

The Business Plan
by Mark Scott (National Franchise Manager - NatWest)

A Business Plan is one of the most important documents for a franchisee. It provides a guide to whether your business is going well or under achieving. It is essential that once written reference is made to it from time to time, to ensure any falling trends are adjusted as soon as possible and with the assistance of the franchisor. The franchisor should be interested in the performance compared to plan, as their income should depend on the success of your business.

Before the Bank is willing to lend, a business plan will be required and should include the following:

One of the most important sections of the plan is the detail about the franchisee. This is because the success of the franchise will be determined, in most cases, by the franchisee and the effort they put in to the business. However a Bank Manager will also assess this during a face to face meeting.

If you are buying an existing franchise business the bank would like to see the past financial performance; the last 3 years accounts would be helpful.

Many franchisors will assist in completing a business plan, however the bank will expect you to know and understand the various statements and financial figures it contains. There will undoubtedly be questions about parts of your plan. The financial information, particularly the forecasts, will help you to assess the performance of the franchise in the early months.

NatWest has a Start-Up Planner, which can assist in completing a plan, should a template from the franchisor not exist.

If you would like to discuss how NatWest can be of assistance to you, your business or would like one of the relevant brochures, please click below to return to the Select Your Franchise Home Page and register your details.