How to Finance the Purchase of a Franchise Business in Australia

Financing a franchise business in Australia may involve a business acquisition loan, franchise-accredited lending, equipment finance, property-supported lending and working-capital facilities.

The appropriate structure depends on whether you are buying an existing franchise or opening a new greenfield location, as well as the franchise brand, total project cost, buyer contribution, experience, security and expected cash flow.

Being part of an established franchise system can give lenders more information about the business model, but it does not automatically make the finance application approvable.

What Costs May Need to Be Financed?

The total cost of acquiring or establishing a franchise can extend well beyond the advertised franchise fee or business purchase price.

Depending on the transaction, funding may be required for:

• the purchase of an existing franchise business;

• the initial franchise fee;

• fit-out and refurbishment;

• vehicles, machinery and equipment;

• opening stock;

• training and establishment costs;

• lease deposits or bank guarantees;

• professional fees; and

• working capital.

Some of these costs may be financed through different facilities.

For example, equipment may be separately financed, while the business purchase or fit-out is funded through a term loan.

Is Financing Different for an Existing and a Greenfield Franchise?

Yes. Lenders assess existing and greenfield franchise businesses differently.

An existing franchise normally has historical financial statements, established sales, employees and a demonstrated trading record. The lender can assess whether the business generates sufficient sustainable earnings to service the proposed debt.

The lender may also consider:

• the purchase price;

• normalised earnings;

• recent sales trends;

• rental costs;

• remaining lease and franchise terms;

• required refurbishment;

• the vendor’s reason for selling; and

• how the business performs relative to comparable franchise locations.

A greenfield franchise has no trading history for that location. The assessment therefore relies more heavily on the franchise system, business plan, cash-flow forecasts, site, lease terms, fit-out budget, buyer experience and available working capital.

Even when the franchise brand is established, a new location still carries start-up and ramp-up risk.

What Does It Mean if the Franchise Is on a Lender’s Approved Panel?

Some lenders assess and accredit particular franchise systems. This is sometimes described as an approved franchise panel.

The lender may review matters such as:

• the history and size of the franchise network;

• store openings and closures;

• franchisee performance;

• failure rates;

• strength of the franchisor;

• operating model; and

• support provided to franchisees.

If the brand is accredited, the lender may have greater familiarity with its business model and may be prepared to consider a higher proportion of business-backed lending. This can sometimes reduce the buyer contribution or reliance on property security.

However, franchise accreditation is not an automatic loan approval. The lender must still assess the borrower, location, transaction and ability to service the debt.

Panel status and lending parameters also differ between lenders and can change over time.

What Do Lenders Assess in a Franchise Business Finance Application in Australia?

Lenders generally consider the complete transaction rather than the franchise brand alone.

Important factors may include:

• the buyer’s industry, business and management experience;

• personal and business credit history;

• buyer contribution;

• available property or other security;

• total project cost;

• sustainable business earnings or realistic forecasts;

• debt-servicing capacity;

• working-capital requirements;

• franchise and lease terms;

• franchisor approval; and

• the strength of the proposed location.

For greenfield franchises, lenders may compare the forecasts with the performance of similar locations. They may also test whether the business has enough funding to operate if sales take longer than expected to reach break-even.

How Much Do You Need to Contribute?

There is no universal deposit requirement for buying a franchise.

The required contribution can depend on whether:

• the franchise system is lender-accredited;

• the business is established or greenfield;

• property security is available;

• the buyer has relevant experience;

• the lender is financing equipment separately;

• the purchase price is supported by earnings; and

• sufficient working capital remains after settlement.

A recognised franchise brand may improve lending appetite, but buyers should not assume that a particular percentage will be available until the full proposal has been assessed.

Can You Obtain Franchise Finance Without Property Security?

This depends on the franchise system, business, borrower and lender.

Some lenders may consider business-backed lending for accredited franchise systems or strong existing franchise businesses.

However, the lender may still require:

• a General Security Agreement over the business;

• director or personal guarantees;

• security over financed equipment; and

• financial reporting or other lending conditions.

Therefore, a loan without property security is not necessarily completely unsecured.

Where business-backed funding is insufficient, the finance structure may combine buyer equity, property-supported lending, equipment finance and, for an existing franchise, vendor finance or deferred consideration.

When Should You Assess the Finance?

Ideally, you should assess the finance before you sign an unconditional business sale agreement, franchise agreement or lease.

A preliminary assessment can help identify:

• which lenders may have appetite for the franchise system;

• whether the brand is accredited;

• the likely buyer contribution;

• available security options;

• how equipment and working capital could be funded; and

• whether the proposed business can support the debt.

This does not replace financial, legal or franchise due diligence. It helps the buyer understand how lenders may view the transaction before making a binding commitment.

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General information only. Seek professional advice for your circumstances.