October 8, 2019

How to finance a franchise?

 

Franchising is a sector that has developed a lot in recent years because it would limit the risks compared to an independent business creation. In addition, it is active in many areas of activity such as catering, clothing, services, real estate transactions, etc. Given the proven success of the concept, it is possible to obtain financing. to prove more easy.

What is the franchise?

Definition of the franchise

The franchise is a method of close and continuous collaboration between a company (usually called the franchisor) and other companies (called franchisees) that are legally and financially distinct and independent. The purpose of a franchise is simple: the franchisor grants the franchisees the right and imposes the obligation to operate for a specified period of time a business in accordance with the concept it has designed.

In France, there are on average 1,600 franchisors for more than 62,000 franchisees and this system continues to grow from year to year.

In concrete terms, franchise agreements consist of licenses of intellectual property rights concerning a trademark, a distinctive sign, a logo, know-how for the sale or distribution of goods and services.

Operation

A franchise agreement is a distribution agreement that associates a company that owns a brand (franchisor) with one or more independent businesses (franchisees). In return for direct or indirect remuneration (percentage of sales for example), the franchisor provides the franchisee with his brand, his products, his know-how and his technical assistance.

The legal point of view

The franchise does not have a particular legal status. This is a contract that must, however, include a certain number of obligations and criteria. The franchise is characterized in particular by the ownership or the right to use the trademark, trade name or service, the trade name or a logo / distinctive sign.

Different types of franchise

There are 3 types of franchise according to a decree issued by the Court of Justice of the European Communities, namely

  • Service Franchise Agreements (The franchisee offers a service under the franchisor’s business name or sign),
  • production franchise agreements (the product is sold as indicated and under the name of franchisor),
  • Distribution franchise contracts (The franchisee sells certain products in a store that bears the franchisor’s sign).

Benefits of a franchise

The franchisee owns his business and remains legally independent, but he enjoys and enjoys the notoriety of the franchisor and its commercial management system (know-how, technical and commercial knowledge, experience, etc.).

The franchisee also enjoys a better return on capital invested compared to an isolated trader.

The advantages are numerous since the franchisee benefits from know-how, technical assistance, commercial, legal, launch advertising, a distribution platform, a follow-up at the start of his activity, initial and ongoing training, preparation for financial records, etc.

For the franchisor, there is no obligation to maintain its brand or brand: it can thus withdraw or maintain it under the terms of the franchise agreement.

Disadvantages of the franchise

The initial investment for a franchise-based business creation and often higher than a creation as a freelance,

The creation costs are identical (purchase of a goodwill, works, stocks, etc.) but there is also an entrance fee to be paid to the franchisor for the use of his market research, his assistance when the engine starts.

Finally, royalties are often paid to the franchisor by the franchisee on the basis of the turnover achieved.

The financing of a franchise, the means available

As for a “classic” business many possibilities are offered to finance a franchise .

Own funds

The personal contribution, which must on average represent 30% of the initial investment. This contribution is calculated during the preparation of the provisional file. The own funds must cover in particular the costs of establishment, the purchase of stocks, the needs in BFR (working capital requirement).

Another way is the recourse to the family, to but (sometimes we speak of the concept of “Love Money”) or to business angels: this means allows the family in particular to access a reduction of income tax calculated on the amounts invested.

State aid, loans of honor

The franchisee will appeal to business creation schemes such as OSEO which is a public body offering a loan for the creation of a company over 5 years with an amount between 2000 and 7000 USD.

But there is also the NACRE (new support for the creation and takeover of business) which is reserved for job seekers.

The franchisee can also obtain a loan of honor in the form of loan at 0% rate over 5 years. 3 other essential organizations share if not the financing of a franchise, namely the ADIE (association for the right to the economic initiative), France Initiative (which is a network of 250 local associations which promote the creation of company) and the Entreprendre network (network of business leaders helping to start a business).

Professional credit

As with any business, franchisees can finance investments through a 7-year professional bank loan or by leasing.

It should be noted that some banks have developed specialized services in franchising. The latter refer franchisors, analyze the DIP and the profitability of the networks. Thus, knowing the concept very well, they can issue a quick decision on new projects.

It is also possible to take over an existing franchise and acquire real estate.