How much of the purchase price should I borrow to buy a Franchise?
My recommendation is to have at least 50% in cash, and not to borrow more than 50%. And the reason for this is simple.
Let me give you an example.
Before you go and buy a house, you have already determined what price range you can afford. You know how much you have saved up and you have already been advised the maximum amount you can borrow – this is based on your level of income which determines your repayment which then determines the maximum amount you can borrow.
So armed with this information you now have a budget for the maximum amount you can spend to buy a house. The end result is that you are going to end up with a house that you can afford to pay off each week based on the income that you earn.
You should follow a similar process when buying a business.
Most Accountants would advise you to never borrow more than 50% of the Capital required to get into that business. And I have to agree with that.
For example, if you are buying a business that has a total purchase price (including all the costs of acquisition of $100,000.00, my rule of thumb is not to borrow more than 50% of the annual Net Profit of the business (before interest, tax and owners wages), or 50% of the all up Purchase Price of the business, whichever is the smaller figure.
Don’t forget that loan repayment have to come from the profit that the business makes.
The rest of the money has to be in cash from your own resources – not borrowings against other assets.
Business loans are generally short term loans of five to ten years (generally they will match the term of your franchise agreement), and have higher interest rates and fees. This means that your loan has to be repaid over this time period therefore increasing the monthly repayment amount. Can the business afford to pay that each month?
In this example $50,000 has to be repaid over 5 years which is $1,100.00 per month (at a 11.5% interest rate). Can the business afford this each month? If it can, will it leave you with enough money to live?
These are simple enough calculations which I would highly recommend doing first when deciding first how much you should borrow.
There are plenty of challenges in running a business – why burden yourself with the extra stress and worry of borrowing too much.
When is a good time to apply for a loan to buy a Franchise?
Start looking at finance options the minute you decide you want to buy a Franchise business.
If you are currently employed, I would look at establishing lines of credit with my Bank on property/assets that you own before resigning your position. Get advice from a Financial Advisor or an Accountant on much money you can borrow on your current assets.
Once you know how much money you can access then you can decide on which Franchise system you can afford to buy.
It can be just heartbreaking after spending a lot of time researching the market to find the business that is right for you only to find out from the Bank that it is way out of your price range and you can fund the acquisition.
How do I decide what sort of business I would like?
Ask yourself the following questions :
Can I see myself getting up every morning and running this business?
Does it excite me?
Does my family support me in my decision in buying this business?
Getting into business is a serious undertaking that is going to consume a lot of your waking hours. So it is a good idea that the business is something that you enjoy doing.
You will be putting a lot of hours into your business especially in the first few years so having the support of your family is very important.
About the Writer
George is CEO of the Bathroom Werx Group – a national Franchise System specialising in quick and affordable bathroom makeovers and renovations.
He is a 30year CPA veteran by profession and started his business as a Franchisee in 1986 after a career in merchant banking. He acquired the Franchisor in 1988 and began franchising in 1990.
Bathroom Werx renovates over 200 bathrooms every month around Australia for Customers, including the world’s leading Hotel groups and Government Housing Departments..
George is one of Australia’s leading exponents of service franchising and is a Past Chairman of the Franchise Council of Australia.
George Yammouni, CPA
Bathroom Werx Australia