An expansion is an exciting time for a franchise. There are new opportunities to discover, new markets to penetrate and new people to meet.
Paying for the expansion? Considerably less exciting. Especially when it comes to raising money for the effort.
Taking on new debt or investors to raise capital for your franchise comes with a host of secondary factors that can impact your business for years to come. To even consider obtaining new capital, you must first have a firm grasp on your franchise’s financial performance and whether you can realistically satisfy the requirements of the new loan from your lender or investor.
Answering the following four questions will help you do just that. Your answers will help you determine your current readiness to seek new capital and identify any financial or operational elements you may need to shore up before moving forward.
As a bonus, going through this exercise should provide some great insight into the overall financial health of your franchise and help you better understand its performance and ability to reach growth goals.
So, let’s begin…
1. Do You Fully Understand the Loan Requirements?
Nearly any institution that gives you money is going to do so with a list of stipulations and/or requirements. Do you know what they are? All of them?
For example, some lenders may require metrics or performance measures your franchise will need to meet on an ongoing basis. This might mean, for example, submitting financial statements every month or every quarter. In this case, you’d need to make sure you know:
- The types of reports you need to provide
- The format for those reports
- The type of infrastructure you need to have in place — for example, a CEO or COO position (more on infrastructure later)
These are just a few examples. The bottom line? It’s important to be proactive in determining the requirements a lender may impose so you’re not blindsided later.
2. Will Your Existing Obligations Take a Back Seat?
Taking on new debt doesn’t mean you can ignore the covenants you currently have in place. Are you comfortably meeting your obligations now? Are you in a solid position to take on more?
Knowing what’s required of you and being able to see how your performance tracks in real-time is infinitely better than waiting until the end of the quarter to run those calculations when it might be too late to address any issues.
Many franchise businesses need help in this area and outsourced accounting can help. RKL Virtual combines best-in-class technology platforms that provide timely performance insights, with experienced advisors to help franchise owners translate those insights into opportunities.
You’re always able to make better decisions when you know you’re on track to meet any covenants currently in place. Having the kind of insight that comes from RKL Virtual could, for example, signal that it’s maybe best to hold off on buying that new piece of equipment because you won’t meet the lender requirements this quarter.
3. Are You Positioned for Scalable Growth?
Investors want to see sustainable and scalable business structures in place before they invest.
How solid is your franchise’s infrastructure in these areas? Are your team, your technology and your processes scalable to meet future growth? The time for flying by the seat of your pants and wearing multiple hats is—or should be—long gone.
Banks and other lenders may require a certain set of internal controls to be in place. Do you have a person at the front desk who opens the mail, codes invoices, makes payments and does reconciliation? Should they really be doing all of that?
Businesses are able to support healthy growth when they have the right people in the right places following the right processes.
At the same time, you want to avoid making processes overly complicated. Think about the procedures you have in place now, and then imagine how they’d work when your franchise is five or ten times larger. Do those processes still make sense? What do you need to do to scale that growth?
Take advantage of the opportunity now to set up the correct processes for the next five to 10 years. Don’t be afraid to collaborate with your advisors, like the team at RKL Virtual, who can suggest best practices and make sure you’re positioned for sustainable growth.
Finally, use a technology platform that complements your business and infrastructure and can provide the insight you need to make these assessments and produce the financial information (cash flow projections, budgets, etc.) your lender requires.
4. What, If Anything, Has Changed Since Your Last Development Period?
If you already received funding for your first two or three locations, take a step back and look at your entire business before seeking financing for the next wave.
Look at what worked and what didn’t. Did you have the right people in place? Did additional costs arise that you should be sure to budget for next time? Was the timeline appropriate?
Mistakes are always learning opportunities. Understanding budgeted costs versus actual costs and how those costs played out, can put you in a stronger lending position for the future. Don’t miss this chance to put yourself in an even better position to scale moving forward.
Reach Out for Help and Advice
The accounting and financial management advisory team at RKL can help franchise owners make smarter decisions when it comes to assessing their readiness to take on new debt or financing. Contact your advisor or use the form below to see how we can help with your franchise financial management.