The Secrets of Pitching for Franchise Investment
Alan J Gibson is a knowledgeable franchise consultant, and he knows how to pitch for investment. In this article he teaches us how to persuade a bank to lend you money and, if that fails, where else to go for funding:
Why the Banks Like Franchising
Contrary to popular belief, bank managers are looking to lend money. However, gone are the days when a prospective business owner can expect to borrow against an ill-conceived business proposition with a poorly thought out business plan.
With a recent survey showing that 45% of start-up businesses will not reach their third birthday it is hardly surprising that banks have become more demanding in terms of the applicants they choose to lend to.
Franchising appeals to the banks, as the replication of a proven business format along with the initial and ongoing training, development and support of an ethically constructed franchise system significantly 'de-risks' a new business venture and tackles head-on the reasons for failure in startups.
Franchising, however, is not a guaranteed route to lending.
Prospective franchisees and the banks still have to take sufficient care to ensure that the business opportunity is bona fide, ethical and has acceptable risk factors.
Here are some of the key areas you should consider before approaching the banks, or alternative lenders, for funding.
What You Should Expect from Your Lender
When assessing a business plan the bank will use a number of tools, including scoring systems, to calculate risk, reward and repayment. The bank's decision is normally based on the traditional 'canons of lending' where the following are fully examined:
- Character – judging the track record and trustworthiness of the applicant.
- Capital – deciding whether the applicant's stake is proportionate to the amount being borrowed.
- Capability – assessing the applicant's skills, experience, and likelihood of success.
- Purpose – deciding whether the risk is acceptable and in the borrower's best interest.
- Amount – the amount to be borrowed including working capital to maintain a positive cash flow.
- Repayment – assessing affordability and whether trading profits will cover repayments.
- Terms – the interest and terms that the bank will offer, reflecting the risk involved.
What You Should Expect from Your Franchisor
Your franchisor should be keeping the franchise departments at the banks updated on the key facts relating to their franchise opportunity and they should be aware of the latest funding criteria for their franchise and the industry in general.
As a rule of thumb, established franchisors with a good trading record should be able to attract 70% funding for their prospective franchisees subject to the applicant's personal circumstances. Newly formed franchise systems, or those with less attractive trading histories, should expect to attract 50% funding for their prospective franchisees. There will however be exceptions to this and your franchisor should be able to explain their current criteria.
You should expect your franchisor, or chosen advisor, to coach you through the application process from start to finish, introducing you to key contacts at the bank and giving you an understanding of what to expect when 'pitching your plan'. They should be there to assist you at each stage from application to drawing down your money.
Your franchisor should also guide you through the business planning process, or preferably put you in touch with a specialist who can help you complete the business plan yourself. I believe it is essential that the prospective franchisee takes ownership of the business planning process and makes it an integral part of assessing the franchise opportunity and its future growth. It is not just to secure funding.
See my previous blog article for an explanation of why writing a business plan is so important, and how to do it successfully. Shape it at 20-25 pages maximum, keep it interesting and informative, and have your executive summary grab the bank manager's attention early.
As well as the business plan, expect the bank to ask for the following supporting documentation:
- A detailed description of personal assets/liabilities/income/expenditure.
- Financial accounts (for owners of existing businesses).
- Last six months' business bank statements (for applicants who are switching banks).
- Last six months' personal bank statements.
- Latest mortgage statement.
- Evidence of savings (relates to the available capital the applicant has to invest).
- Identification (passport and Visa confirmation).
Some Common Mistakes to Avoid
Without good support and advice, prospective franchisees are likely to make costly mistakes when it comes to pitching and whilst the banks will generally be supportive, they will expect you to know your plan inside out.
Listed below are some of the common mistakes you need to avoid:
Lack of ownership of your plan.
- Not knowing your plan intimately.
- Having limited understanding of the franchisor's business and the sector you are interested in.
- Missing out key sections of the plan and not checking it for errors and spelling mistakes.
- Not knowing how much you need to borrow.
- Not demonstrating that you have sufficient capital to invest.
Send a copy of your plan in advance and practice your delivery. Expect to be asked questions about, and challenged on, your assumptions and take care that you are able to provide confident and factually correct answers.
Alternative Sources of Finance
As the high street banks have become more averse to risk in their lending criteria there has been a corresponding growth in the number of alternative lending sources. These channels can ultimately be more costly but can also provide funding quickly with less formality and 'hassle'.
Alternative sources could include the following:
- Crowd-funding platforms.
- Government funding initiatives.
- Pension led funding.
- Sector specific/niche lenders.
- Franchisor funding schemes.
If contemplating these options it is recommended that prospective franchisees get sound financial advice from a professional and that the cost of financing, the impact on the business plan and the risk versus reward is fully assessed.
To find out more about Alan and his team of consultants, visit The Franchising Centre website.