Buying a franchise can be an attractive way to get into business ownership. Rather than starting from scratch, you may be buying into an established brand with a proven business model, existing customers and support from the franchisor.
But while a franchise can offer some advantages over starting an independent business, securing finance to buy one isn’t always straightforward.
There are several factors lenders consider when assessing a franchise purchase, from the strength of the franchise system to the financial performance of the individual business you’re looking to buy. Understanding these requirements early can help you plan your purchase, work out how much funding you’ll need and avoid unnecessary delays.
One of the most important things to understand is that getting the right finance in place involves more than simply borrowing enough to cover the purchase price.
Here’s what you need to know before taking the next step.
Why Is Franchise Finance Different From a Standard Business Loan
One of the potential advantages of buying a franchise is that lenders may view an established franchise system more favourably than an independent start up.
A recognised brand, an established operating model, franchisor training and ongoing support can give lenders greater confidence in how the business is expected to perform.
Some lenders maintain accredited franchise lists covering selected franchise brands. If the franchise you’re buying is on a lender’s approved list, the application may benefit from a more streamlined assessment process and, in some cases, more favourable lending terms or a lower equity contribution.
However, not all franchises are treated equally. A well established national brand with a strong track record may be assessed differently from a smaller franchise system with limited operating history.
Even if a franchise is accredited, lenders will still assess the individual transaction, your financial position and the business’s ability to service the proposed loan.
This is why understanding which lenders are comfortable with your particular franchise can make a significant difference to the finance process.
What Do Lenders Look For When Assessing a Franchise Purchase
When assessing a franchise finance application, lenders look at more than the purchase price. They want to understand the business you’re buying, the agreement you’re entering into and your ability to operate the business successfully.
Some of the key considerations include:
The franchise agreement: Lenders will look at the length of the agreement, renewal options, territory rights and the conditions under which the agreement can be terminated or transferred. The remaining term of a franchise agreement can be particularly important when determining an appropriate loan term.
The franchisor’s financial position: The strength of the overall franchise system matters. Lenders may consider the franchisor’s financial health, the performance of other franchisees and the stability of the brand.
The business’s financial history: If you’re purchasing an existing outlet, lenders will generally want to review its historical financial statements and trading performance. This helps establish whether the business has generated enough income to support the proposed borrowing.
Your experience and financial position: Your industry experience, management background, available funds and existing financial commitments will all be relevant. If you’re new to the industry, lenders may look more closely at your business plan, the support available from the franchisor and how you’ll manage the operation.
Personal guarantees and security: Depending on the lender and the transaction, you may be required to provide personal guarantees or offer additional security.
Understanding these requirements before you commit to a purchase can help identify potential issues early and give you a clearer picture of what’s achievable.
How Much Deposit Do You Need to Buy a Franchise?
The amount of money you’ll need to contribute towards a franchise purchase depends on several factors, including the franchise brand, the lender, the purchase price and the overall strength of the application.
As a general guide, some lenders may look for an equity contribution of around 30% to 50% of the total purchase cost for a franchise acquisition.
However, this isn’t a fixed rule.
Selected franchises on major banks’ accredited lists may qualify for higher loan-to-value ratios (LVR), potentially reducing the amount of equity required. Other transactions may require a larger contribution, particularly where the business has limited trading history, the purchase relies heavily on goodwill or the lender considers the overall risk to be higher.
Your contribution might come from cash savings, equity in an existing property or other acceptable sources of funds.
It’s also important to remember that the purchase price isn’t necessarily the full amount you’ll need.
Legal fees, accounting costs, franchise transfer fees, initial stock, equipment, fit out costs and working capital can all add to the upfront funding requirement.
Before proceeding, it’s worth establishing both how much you can borrow and how much money you’ll need to contribute to get the business operating comfortably.
Goodwill, Assets and Stock: Why the Purchase Breakdown Matters
Not every dollar of a franchise purchase is treated the same way by a lender.
A purchase price may include several components, such as goodwill, equipment, vehicles, furniture, existing stock and other business assets. How these are valued and financed can influence the structure of your loan.
Goodwill represents the value attributed to the business beyond its identifiable physical assets. This might reflect its reputation, established customer base, location or earning potential.
Financing goodwill can be more challenging because it doesn’t provide the lender with a physical asset to secure against. Lenders may place greater emphasis on the business’s cash flow, profitability and ability to support the borrowing. Tangible assets, such as equipment and vehicles, may provide identifiable security for a loan, depending on the asset and the lender’s requirements.
Stock can also form part of the purchase, although whether it can be financed separately or included in a broader facility depends on the transaction and lender.
Getting a clear breakdown of the purchase price is therefore important. It allows the finance to be structured around the actual transaction rather than treating the entire amount as one undifferentiated cost.
Cash Flow and Serviceability: Can the Business Afford the Loan?
A franchise might have an established brand and a promising outlook, but lenders still need to be satisfied that the business can generate enough income to meet its financial commitments.
This is where profitability and cash flow forecasting become particularly important.
For an existing business, lenders will generally review historical financial information to understand its performance. This may include EBITDA, which measures earnings before interest, tax, depreciation and amortisation.
They may also consider adjustments to reported earnings, such as certain one-off expenses or other costs that are unlikely to continue under the new ownership.
However, these adjustments aren’t automatically accepted. Lenders will want evidence to support them and will consider the ongoing costs of running the business, including the cost of paying the new owner’s wage where applicable.
Two calculations that may feature in the assessment are:
- Debt Service Coverage Ratio (DSCR): Assesses whether the business generates sufficient cash flow to cover its debt repayments.
- Interest Coverage Ratio (ICR): Looks at the business’s capacity to meet its interest obligations from its earnings.
The specific calculations and requirements vary between lenders.
For a new franchisee, particularly someone entering the industry for the first time, a realistic cash flow forecast is also important. Forecasting the first 12 to 24 months can help demonstrate how the business is expected to perform as you establish yourself.
The forecast should account for more than sales. Wages, rent, franchise royalties, marketing levies, stock purchases, insurance and other operating expenses all affect the cash available to meet loan repayments.
A business can look profitable on paper but still experience cash flow pressure if its income and expenses aren’t properly planned.
What Security Will You Need to Provide?
Security requirements vary depending on the lender, the amount being borrowed and the nature of the franchise purchase.
Potential forms of security include residential or commercial property, business assets and personal guarantees from the business owners or directors.
Some lenders may also require a General Security Agreement (GSA) over business assets or other security arrangements, depending on the circumstances.
For some borrowers, using property equity may help support the application. A strong equity contribution can also reduce the amount being borrowed and improve the overall lending position.
This can be particularly relevant when purchasing a business with limited trading history or a significant goodwill component.
However, providing security doesn’t automatically mean a loan will be approved. Lenders still need to be satisfied that the business can service the debt and that the overall transaction is viable.
It’s important to understand exactly what you’re being asked to provide and the risks associated with any guarantees or assets offered as security.
Does the Franchisor Help With Finance?
It can be worth speaking with the franchisor about finance early in the process.
Some franchise systems have established relationships with lenders or finance providers who understand their business model and have experience assessing franchise purchases.
In certain circumstances, a franchisor may also offer vendor finance or deferred payment arrangements for part of the purchase or associated costs.
These options aren’t available across all franchise systems, and the terms will vary. However, knowing what’s available may help you understand the full range of funding options before approaching a lender.
The franchisor may also be able to provide information about the financial performance of existing outlets, expected start-up costs and the support available to new franchisees.
That information can help you prepare a more informed business plan and finance application.
Common Mistakes to Avoid When Buying a Franchise
Buying a franchise involves a number of moving parts, and overlooking one aspect can create unnecessary pressure later.
Here are four common pitfalls to watch out for.
1. Underestimating working capital
Having enough money to complete the purchase doesn’t necessarily mean you’ll have enough to operate the business comfortably. Allow for wages, stock, rent and other expenses while the business settles under your ownership.
2. Overlooking the franchise agreement
Don’t focus solely on the purchase price and expected earnings. The agreement’s terms, renewal conditions, ongoing fees and exit provisions can all affect the long-term viability of the investment. Obtain appropriate legal and accounting advice before committing.
3. Assuming every franchise qualifies for the same finance
Lenders have different policies, and their appetite for particular franchise brands can vary considerably. A finance structure that works for one franchise may not be suitable for another.
4. Leaving finance until the last minute
Franchise acquisitions often involve agreed timeframes for due diligence, contracts and settlement. Leaving the finance application too late can put unnecessary pressure on the transaction.
It’s worth speaking with a finance broker before committing to a purchase, or as early as possible in the process, so you can understand the likely requirements and identify potential obstacles.
How Ryo Finance Can Help With Franchise Finance
Buying a franchise is a significant financial commitment, and having the right finance structure in place can make a real difference to how you approach the purchase.
At Ryo Finance, we look at the individual transaction rather than assuming there’s one solution that suits every business.
That starts with understanding the franchise you’re buying, how the purchase is structured, your financial position and what you want to achieve.
From there, we can identify lenders whose policies align with the transaction, consider the available funding options and help structure an application that clearly explains the business opportunity and addresses the lender’s likely questions.
Preparing a thorough finance submission is an important part of this process. Presenting the financial information, proposed loan structure and supporting documentation in a clear, consistent way can help the lender assess the application with a better understanding of the transaction.
We can also help you understand the likely equity contribution, security requirements and information you’ll need to provide as the application progresses.
If you’re considering buying a franchise in Bunbury or elsewhere across the South West, it’s worth having a conversation about finance before you commit to the purchase.
Getting an understanding of your options early can help you make more informed decisions and move forward with a clearer picture of what’s involved.
Contact Ryo Finance to discuss your plans and find out how we can help with your franchise finance requirements.
How much deposit do I need to buy a franchise in Australia?
The deposit required to buy a franchise depends on the lender, franchise brand, purchase price and your financial position. Some lenders may require an equity contribution of around 30% to 50%, while selected accredited franchises may qualify for higher borrowing ratios. The actual requirement will depend on the individual transaction.
Can I get a business loan to buy a franchise?
Yes, some lenders offer business finance specifically suited to franchise acquisitions. The available options depend on the franchise brand, the financial performance of the business, your experience and financial position, and the proposed loan structure. A finance broker can help identify lenders whose criteria align with your circumstances.
What do lenders look for when assessing franchise finance?
Lenders generally consider the franchise agreement, the financial strength of the franchisor, the business’s historical or forecast earnings, your financial position and experience, and the security available. They also assess whether the business is expected to generate enough cash flow to meet its loan repayments.
Can I finance the goodwill when buying a franchise?
Goodwill can sometimes be financed as part of a franchise acquisition, but it may be more difficult to fund than tangible assets such as equipment or vehicles. Lenders may place greater emphasis on the business’s profitability, cash flow and ability to service the debt. The available options depend on the transaction and the lender’s lending criteria.
