Funding a food and beverage franchise
The purchase of a food and beverage franchise business is a significant investment decision which can be both an exciting and anxious time for a potential franchisee.
The food and beverage sector has always offered many appealing opportunities in franchising with a large variety of options available to potential buyers. Funding a food and beverage franchise business is a very unique experience as both the franchisee and the bank need to consider additional benchmarking information.
Benchmarks are a guide which assists a franchise business to compare itself against similar businesses within the same franchise system or within the same industry. From a bank’s perspective benchmarks are vital as they demonstrate the business’s ability to service its debts.
Key benchmarks which help assess the profitability of a food and beverage franchise business includes sales performance; gross profit (GP); food and beverage costs; wages and rent. Business profitability in turn determines the ability of the business to obtain funding and rewards its owners for the investment risk.
Sales are influenced by such aspects as the drawing power of the particular brand, its location, price, availability of parking, service proposition and atmosphere etc. Even if sales are strong that does not necessarily lead to increased profitability unless a business can also sustain or improve the gross profit margin and minimise other operating costs including expenses such as wages.
FOOD AND BEVERAGE COSTS
Understanding food and beverage costs and how to control these costs can be the key to success in the food and beverage industry. The fact that franchisees can compare their cost of food with others in the same franchise system (benchmarking) is a really important advantage when it comes to getting the balance right. Lowering food and beverage costs increases the gross profit margin, which influences the bottom line and hence improves the business’s ability to service their debt.
Many franchise food and beverage brands have very sophisticated measurement tools and management information systems to assist with controlling food and beverage costs. These tools break sales down into categories or even specific items so that franchisees are aware of what contribution each category or item makes to their gross profit. Gross profit is also influenced by factors like wastage and shrinkage (theft) which need to be carefully monitored by a business.
Larger volume of food and beverage purchases from the bigger franchises enables better negotiated prices than individual businesses, lowering their food and beverage costs and increasing their competitiveness and profitability.
Preparing and serving food and beverages is a fairly labour intensive activity and the profitability of any business is damaged if the business is over-staffed. Getting the staffing levels right compared to other similar businesses is very important and a key benchmark measurement. Wages is one key aspect which franchisees have control over. By simply rectifying overstaffing and/ or working in the business as an owner/ operator, it is sometimes possible to increase the profitability of the business significantly.
For many food and beverage businesses a location which offers superior foot traffic, vehicle traffic and good parking becomes an important factor to drive and influence sales. These location advantages in turn are often also a direct influence and will usually result in much higher rent costs/overheads.
Shopping Centre locations also present specific challenges because the rents are generally higher. The rent payable has to be carefully considered before the purchase of a business because it creates a large fixed cost component which can have a direct impact on profitability and the ability of the business to survive a period of downturns in sales.
With some preparation and planning franchisees can save time and money in the funding process. After identifying the food and beverage franchise opportunity, the next step is to determine ways to fund the purchase. It is therefore important to work with the franchisor, an accountant and lawyer to find out what is achievable, what is realistic and to put together a comprehensive business plan to achieve the right funding available to you.
A business plan will assist franchisees to understand the majority of their financial requirements such as purchase price and setup costs, stock requirements, debtor levels and ingoing costs (for example, legal fees, accounting fees, stamp duty, government charges, insurance prepayments, landlord bonds etc.)
Franchisees should choose a bank which has expertise in the franchise sector and which provides a range of financial products and services that the franchise business will need. In all probability this will not just be one simple loan but will involve a combination of two or more of the following options:
Business Term Loans
Bank business term loans are repayable over a specified term and are therefore a well suited finance for the initial purchase, or the set-up of a business. This can include funding for the franchise fee, initial stock, fit-out and equipment costs. Care should be taken to match the term of the loan with the remaining term of lease and franchise agreements to ensure that business debt is fully paid at the expiry of these agreements.
Generally business term loans can be secured against equity in the borrower’s residential property or, in some situations, the borrower may be able to use the assets of the franchise as part of the security mix. This will depend on the arrangements between the bank and the franchisor and if an accreditation is in place. In practice if an accreditation is in place this means that a potential franchisee needs less of their own money to get into a franchise business as they can secure part of the investment against the assets and future cash flow of the business.
Short term funding – overdraft
This type of finance is suited to cover cash flow fluctuations. Overdrafts may be suitable for seasonal business and franchises with a high level of debtors or stock. This facility is generally secured by the borrower’s residential property.
Equipment finance and leasing
Many food and beverage businesses require specialised equipment such as pizza ovens, coffee machines, cool rooms, display cabinets and vehicles. Equipment finance is normally managed using the equipment as security and over a term within the useful working life of the item being funded. Equipment finance has the advantage of lowering the equity/investment required, as funding could be up to 80 – 100 per cent of value (if new). This is a facility for a specified term secured by equipment and may be provided by a bank or finance company.
This is used extensively, particularly where long-term funding is required. It may require an owner’s contribution for example, free equity in a property or the total funding can be secured against the property. Other forms of security or third party guarantees can also be considered. Secured lending would usually be the cheapest option and the part of the loan secured against property can often be done over a longer term, which can lower monthly repayments and ease cash flow pressures.
In some instances another possible source of funding could come via the landlord in the form of fit out contributions and set up costs. A bank with a specialist franchise team like Westpac is often prepared to lend against new (greenfield) and existing franchise businesses which are accredited. If you are looking at getting into a food and beverage business then buying a franchise may enable you to afford a much larger food business than if setting up an independent outlet.
Westpac has supported the franchise sector in Australia for over 20 years. The growth of a specific franchise system is supported by providing streamlined processes for lending, as well as access to other lending transactional solutions. The bank also has a national network of franchise specialist business bankers who are able to deal with specific day to day needs of the franchise customer.
Labrina Tsekouras is the Westpac Senior Business Development Manager for Victoria and Tasmania and specialises in the franchising sector.
Contact Labrina at:
Phone: 0418 246 903
The information contained in this article is intended as a guide only and is not intended as an exhaustive list of matters to be considered. Persons entering into franchise agreements should seek their own independent legal, accounting and other advice.