Franchise financing

A franchise buyer meets this term when arranging the funding for the purchase and the franchisor’s fees and start-up costs. The general routes are covered in the answer on whether a franchise purchase can be financed.

What the sources say

BDC says franchise purchase agreements can vary greatly from franchisor to franchisor, and that a franchisee needs to understand the lease terms and the contract signed with the franchisor. It also says it is important to have money available to inject into the business if sales fall short of projections.

In Ontario, the general regulation under the Arthur Wishart Act lists, among what a disclosure document must include, the terms and conditions of financing arrangements the franchisor or its associate offers directly or indirectly to franchisees. If an earnings projection is provided, the document must include a statement of its reasonable basis, its underlying assumptions and where substantiating information can be inspected. See financial projections.

What to ask

• Which documents the lender needs, and whether it wants the franchisor’s approval of the buyer first.
• Whether the franchisor or an associate offers financing, and on what terms.
• What basis and assumptions sit behind any earnings projection.