Westpac - Finding Funding in Difficult Times

If you are one of the many Mainland residents who has never ventured across the strait, the chances are that unless you are an avid reader of this magazine then some of the names in Franchise New Zealand, such as Sierra Coffee, Smart, and Saddlery Warehouse, won't mean much to you. There are many well-known franchises from the north which have not yet arrived in the South Island. Equally, if you're a North Islander, you may not be familiar with such well-known Mainland brands as Night 'n' Day, Reload, Filadelfios and The Shot. Now, with borrowing costs at historically low levels, could be as good a time as any to investigate some of these opportunities.

Statistics confirm that the initial and ongoing support provided by well-structured and successful franchises results in franchisees having a lower failure rate than independent businesses. But what has changed as a result of the Credit Crunch? Is now the right time to take out a loan or invest the equity in your property in a franchise? Will it be hard to fund a new venture or will the bank impose onerous lending conditions on businesses?

Whether you are a canny Mainlander or come from elsewhere in New Zealand, there is no doubt that these days you, your accountant and your bank will be looking a lot more closely at the numbers than might have been the case a year ago. Many sources of funding may have dried up, but the funders who really understand the franchising business model will still be able to assist. This is, after all, one of the strengths of franchising - that you can compare results and projections (through benchmarking) and get to a much more informed position before deciding whether to proceed.

In this market, a solid profitable business that is built on a proven business model would present a lot less risk both to you and your bank than some highly speculative property investment that creates strong negative cashflow or a small, unsupported business.

Positive Factors

The new realism created by the worldwide economic crisis also confirms some basic economic truths and creates great opportunities. A few positives are:

• Funding costs have dropped dramatically;
• There is decreasing competition in some sectors;
• Good staff may be more available and affordable in your sector;
• Good locations are more readily available;
• Rents may be more reasonable;
• Initial rent-free periods can assist new businesses;
• Landlords may be prepared to make fit-out contributions.

This is all good news because, given these advantages, the business model of your chosen franchise may stack up extremely well, supporting profit the way it was originally designed to do. In addition, you may actually be able to afford a rather larger business than might have been the case before. The golden rule for business funding has always been not ‘how much can I borrow?' but ‘how much can my business afford to make repayments on?' With lower funding costs, your dream business could be more within reach than you thought.

Buyer Beware

Those are the upsides. At the same time, though, whatever franchise you are interested in you need to do very realistic "what if?" and worst case scenarios to ensure that you (and your banker) are comfortable with any specific risks presented by the particular business or industry into which you are entering. Talk to advisors who really know the industry and franchise such as specialist franchise accountants, lawyers and bankers. This is always important, but it is more than ever vital at the moment to ensure that you make the right decision for your future.  Here are some key points to look out for:

• It's important to assess risk properly;
• Getting the fundamentals of the business right and understanding the particular franchise's model are more important than ever;
• Do the numbers (with the right advisors) to convince yourself that this is a real opportunity;
• The more correct (and up to date!) information you can supply your banker, the easier it will be to get finance;
• Whichever industry the franchise you are looking at operates in, there are likely to be others in the same area. Some other franchises may have better fundamentals, like rent, funding cost, locations, buying power, etc. Shop around.
• Do not overpay for existing businesses - their profitability may have dropped a lot in the last six months and the risk premium (the rate of return you should expect on your investment) would have gone up as well. In general, lower prices are being paid for small businesses at the moment. Of course, this may also mean you can afford an opportunity that was out of your reach last year.

Opportunities Abound

While the talk about the doom and gloom of the world's economies seems relentless, I am a true believer that with every obstacle there is an opportunity. In the South Island we are not immune to the economic issues around us but we perhaps take a longer-term view. It is widely agreed that, whilst we don't enjoy the highs to the same extremes as areas further north, we also don't experience the lows to the same depths.

Experienced businesspeople therefore know that now can be a time of opportunity. If the franchise is well-structured, the numbers stack up and you have the ability to make things happen, it's worth investigating your options. Many a good business has been started in bad times...

This article is taken from Franchise New Zealand magazine Volume 18 Issue 1

Contact details for Westpac

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