How to Understand Banks and Franchising

from Joseph Pisani, National Manager of Franchising Services, Bank of Montreal.

Purchasing a franchised business is not an easy process. As a prospective franchisee, you must take your time, performing a great deal of research and due diligence before finally making the decision to buy.

Following this decision, your focus will turn to financing and the several funding options available to you. In most situations, this will bring you straight to the doors of your local bank. As you take the next step in your journey, it is important to know what to expect.

You may find this experience frustrating or confusing; you may also feel uncertain about how to effectively and convincingly prepare for meeting a banker. How do you communicate what is needed? What should your application include? Who should you approach? When is the best time to involve the bank? Thankfully, by finding the right banker and developing a detailed financial proposal, you can address the key points you need in order to fund your new franchise venture.

What are bankers looking for?

Very simply, bankers expect to see(and have you verbally communicate) a realistic business plan; including what you believe are reasonable and achievable results. Business projections must be based on strong supporting data
and sensible assumptions. This data is typically presented in what is called a bank financing proposal, a written document designed to deliver:

a comprehensive business plan, including details as to how your business’s goals will be achieved;
the amount of money required and from what sources;
how the money will be used;
how your loans will be repaid;
what the banker may expect to see in terms of overall business results(consider preparing a three-year financial forecast); and
what security will be provided (such as a general charge over all business assets, personal guarantees, etc.). All major financial institutions provide publications on this subject, which often provide examples of what should be included and how to best present it. Given these resources, one should be aware of the bank’s expectations.

When preparing your proposal, be thorough and accurate, there are no short cuts to be taken in this process. Also, keep your proposal simple and factual. Acknowledge any possible risks or potential pitfalls. Not only is this honest, it will also illustrate that you are aware of the relevant risks and will show the banker you are able to anticipate and manage them. Include a one or two page summary that briefly describes the business opportunity, its history, where its future lies and the money you require to get it there.

Overall, your proposal should include:

a cover page with your name, address and any other key contact names (e.g. your lawyer and accountant):
a table of contents (including page numbers);
a summary of financing being requested;
an overview of the industry you plan to enter (e.g. key drivers, demographics, trends);
your management structure (people, background, qualifications and responsibilities);
descriptions of product/service offered;
details about your prospective new market (e.g. size, competition, supply, overall standing);
a financing outline (emphasizing the use of requested funds);
basic corporate information about your franchised business (names of your shareholders, lawyer, accountant, etc.); and
appendices (these can include individual biographies, product literature, historical financial statements, forecast income and cash flow statements).

The banker’s questions

There are no secrets to effectively dealing with the bank. Banks openly publish articles on the subject of franchise financing, as well as how to submit a comprehensive financing proposal. Be prepared to provide information and/or commentary on the following (if you are in a province where franchise legislation exists much of this information will be contained in the franchisor’s Disclosure Document):

Franchise business track record. How successful is the franchise business – network growth, profitability, franchise problems or failures, etc.
Consumer demand for the franchise product or service. Is demand growing or stable? How do offerings compare with the competition and how much competition is there likely to be?
Franchise agreement. Have you reviewed it with a lawyer who specializes in franchise law? Are you clear on the rules/terms/conditions? Is it in line with your expectations?
Franchise structure and ongoing fees. Through what means does the franchisor derive its income? Do you consider the franchisor’s costs and fees to be fair and reasonable relative to other franchised businesses in that sector? If they seem high, ask why (there may be a good reason). Ensure you understand every fee obligation, from royalties and supplies to advertising funds and renewal fees.
Financial strength of the franchisor. Is the franchisor financially stable? Is it willing to provide you with any information you could review with your accountant or banker? What is the background and experience level of its senior management?
Franchisor’s financial interest. Does the franchisor own the location or simply lease it?
Growth and expansion plans. Is the franchises growing and if so, how and where? Will you have exclusive rights to an area? Are there any plans to change product lines, site appearance, etc?
Franchisor’s market intelligence and research capabilities. How does the franchisor conduct research for locations, product lines, market changes, etc? What forms of support will be provided to you, both at the outset and ongoing, at head office and in the field? Does the franchisor assist with the development of your business plan?
Franchisor’s selection criteria. What sort of franchisee is the franchisor looking for? Are there any special training requirements? Can you see yourself working with the franchisor’s key people? Are your expectations in harmony with the franchisor’s?
Financial profile on your franchise location. What is the total cost to establish a franchise location? Get details on all areas, including equipment, leaseholds, inventory, prepaids, etc. What is the minimum equity requirement on your part? How do you plan to finance the rest?

Finding help

During the preliminary stages of developing your proposal, it is in your best interest to engage other resources and professionals, such as existing franchisees and your franchisor, your accountant and other business associates. However, at the end of the day, you have to be confident with your proposal and prepared to respond to any reasonable questions the banker might ask.

Before you complete your financingn proposal, you may find it beneficial to have a preliminary discussion with your existing banker, so long as he or she is well-versed in commercial lending (these people are usually referred to as commercial account managers). Even better is a banker with specific experience in franchise financing.

If your current banker’s expertise is in personal lending, ask for an introduction to someone else in the institution who specializes in commercial lending. Share your ideas and seek advice on financing availability, any restrictions, various loan facilities, as well as potential cash management and electronic banking services.

Consider your initial encounter with the banker as an opportunity to establish an ongoing, supportive relationship. Early in the process, you should be able to say ‘yes’ to three questions:

Does this banker understand my business?
Do I really want to do business with this banker?
Will I be able to rely on this banker for help and advice in the future?

What happens next?

While your primary objective is to obtain bank financing, do not assume all your banking arrangements are in place once you’ve secured your loan. Consider other needs—cash management, electronic banking, payroll and credit cards, just to name a few—and ask your banker about what else you require to operate your business successfully.

Remember as well that your first experience arranging financing for your business is only the start of the banking relationship. In most cases, business credit facilities are subject to the bank’s annual review of the business, its financial results and overall account performance. Going forward you can strengthen and expand your relationship with your banker by:

providing consistent updates and financial reports concerning results, plans, successes and challenges (highlight the good news, but do not hide the bad);
holding regular meetings to discuss business results, including a visit to the premises to give the banker a firsthand look; and
using the banker as a connection to other professional resources and business contacts who can help you grow your business.

Are you ready?

For a prospective franchisee, using the information available from banks, existing franchisees and professional groups will improve your odds of obtaining initial bank financing. This information can also enhance your chances for long-term success and the continuing support of the banker.

If you’re ready to get started, be sure to engage a banker with these ideas in mind. The right bank can help provide you with the expertise and guidance you need to find customized solutions to meet all your financial needs.

Joseph Pisani has been in Commercial Banking for over 12 years. Joseph joined the Bank of Montreal’s Franchising Services Department in 2006. His past experiences include roles as Commercial Banking Account Manager, and operating a small business. Based out of Toronto, Joseph’s role as National Manager Franchising Services consists of identifying, developing and managing a portfolio of financial service programs aimed at facilitating financing and cash management products for selected franchise networks.

Phone: (416) 927-6025
Email: joseph.pisani@bmo.com