10 great tips on how to Identify a Franchise Business that is Financeable.
1. Time in Business
Banks usually want to see a minimum of 3 – 5 years in business with 2 – 3 years of profit and cash flow. A long track record and strong history makes a business more attractive to a lender.
2. Cash flow/profit history
Banks prefer 3 years of profit, consistency, and sales growth. This is what determines the value, which is usually between 2x – 4x the cash flow.
3. History of the Franchise Brand
The longer a franchise system has been in business usually means there is stronger brand recognition and often times a larger company with more established locations. This can mean a lower risk loan to a bank.
4. Is the franchise resale priced less that 4x earnings (profit)?
Banks will usually require a business valuation before funding. Businesses usually sell for 2x – 4x the cash flow, including the seller’s salary. A sales price that is less than 4x earnings make a business more sell-able.
5. Strength of the financials
A franchise owner that can consistently show increasing sales and profit and that pays taxes reflected on their profit & loss statement and business tax returns have a much higher chance of selling their franchise. This makes it easier for a franchise buyer to obtain a bank loan.
6. Local Competition
If your business plan clearly discusses how your franchise will continue to compete and how it has superior products and/or services there is a higher chance of loan approval.
7. Length of Lease/Term
The lease terms when acquiring a franchise resale usually have to match the loan term (7 – 25 years).
8. Is Real Estate included in purchase?
Real Estate included in the purchase price is usually a more attractive loan to a bank (more profit in higher size loans). Not only does real estate extend the term on repaying the loan, but the real estate collateral also offers less risk to the lender.
9. Franchisor FDD details – any negatives?
If the FDD (Franchise Disclosure Document) has a strong history showing few failed locations and has no current or outstanding legal matters, then the bank will have higher confidence in the franchise brand, which will give the loan request a higher chance of approval. Also, if the average sales/profit #’s are included in the item 19 of the FDD, then it is a plus.
10. Is the Franchise Brand SBA approved?
If obtaining an SBA loan, most banks will only lend on a franchise brand that has been reviewed and pre-qualified by the SBA, whether it’s a start-up or an acquisition.
To connect with a franchise funding specialist visit our Learn my borrowing potential page.
Franchise Flippers thanks Don Johnson, President of Diamond Financial Services and owner of FranchiseLenders.com for contributing these tips and sharing his expertise in the franchise resale and lending space.
Franchise Flippers is the premier franchise resale marketplace and resource center. We are dedicated to helping franchise buyers and sellers connect and get deals done.
