Simplify Access to Financing for Prospective Franchisees

So, you found your candidate who has the right skills, shares the same values as you, has the experience needed, and has the same vision… GREAT!  But the candidate does not have 100% of the amount necessary to finance his project of becoming a franchisee. Sure, you can give him some basic advice and let him find the financing he needs. Or you can support and assist him in this process. How? What’s in it for you? By helping him, you speed up the process of opening his franchise location, maximize his chances of obtaining the necessary funding, and above all you build a strong relationship with your franchisee from the very start.

Internal Funding within Larger Networks

A growing number of franchisors now offer internal funding. They lend a portion of the amount needed to open a franchise. However, that means you must make sure you have sufficient financial means for this since it is you, the franchisor, who will bear a portion of the risk. Another approach is a hybrid strategy whereas you become a co-owner of this franchise location. This approach implies less risk since the franchisor retains a certain decision power in exchange for his participation in the investment. We invite you to consult with our partner Fasken or another legal firm specializing in franchising to fully understand the implications of this decision since there are legal consequences to consider.

A Surety Bond as Collateral for the Franchisee’s Financial Obligations

A surety bond is issued by a financially sound insurance company through a bond broker. It offers protection to the franchisor, in exchange for a premium, in case the franchisee fails to fulfill his financial obligations. Using the surety bond as a funding strategy has several benefits both for the franchisor and the franchisee. One of the key advantages for the franchisee is that the bond does not affect his borrowing capacity and operating credit. On the franchisor’s side, the bond allows a part of the financial risk to be transferred to a third party (the insurer) and offers a more accessible alternative, for many franchisees, than a letter of credit from a bank. Contact us to be referred to our insurance partner.

Preapproval by a Financial Institution

Our partner RBC Royal Bank and other financial institutions can analyze your business concept, your financial results and the results of your current franchisees, your expansion projects and other elements to prequalify your applying franchisees, making it much easier for them to obtain funding. Moreover, FlagFranchise works closely with RBC to help the approval process for your selection. Indeed, FlagFranchise’s compatibility reports complement the bank’s analysis and evaluation. At a glance, the bank can see the franchisee’s compatibility with your needs. The FlagFranchise team can also provide services to franchisors, through its partner Totem Performance organisationnelle, with the objective to optimize their performance, which also contributes to the approval process. RBC and FlagFranchise work together to support franchisees at every financing step. They will be referred to a branch, all with the support of the franchisor’s senior advisor. It is a simple yet effective procedure.

In conclusion, be vigilant when you provide a pro forma financial statement to your future franchisees. It is very important to make it clear that these numbers are for indicative purposes only. You certainly do not want to guarantee the financial results or in any way suggest that it is 100% sure that these numbers will be reached. Use your sound judgement!

Do not hesitate to contact us to be referred to the right partner for professional support and assistance.

FlagFranchise Team

* We would like to thank our partners for their contribution to this article:

• Benoit Guilbault, Director, Business Accounts, RBC Royal Bank, (450) 667-3869, guilbault@rbc.com
• David Chartrand, CPA, CMA, Vice President, GPL Assurance Inc., a wholly-owned subsidiary of Arthur J. Gallagher Canada Limited, (450) 978-4446, DChartrand@gplassurance.com
• Jean H. Gagnon, AdE Counsel, Fasken Martineau DuMoulin, (514) 397-7669, jhgagnon@fasken.com
• Sylvie Grégoire, MBA, CRHA, President, Totem Performance organisationnelle, 1-844-347-7633, sylvie@totemconseil.com