A: The current economic climate presents headwinds for some younger Canadians, as they look to find permanent employment. In fact, a recent Bank of Canada survey found that hiring will not be top of mind for most Canadian businesses.
As a result, younger Canadians in the labour market are starting to look at the franchise industry as an option. According to some reports, around 30 per cent of Canadians showing interest in buying franchises fit into the millennial demographic. A major driving force behind this is that franchising provides millennials with an opportunity to be in the driver’s seat of their own business and engage in a career they enjoy. However, an early challenge that younger Canadians can face is having the necessary start-up capital.
Younger Canadians should consider the following advice when they’re looking to get their foot in the door of a franchise.
Let’s talk capital
The average initial investment for a single unit franchise typically falls between $250,000 and $300,000. This can be a sizeable amount of money, especially for someone just starting out. It’s also important to keep in mind that, when funding the purchase of a franchise, most franchisors will require a substantial down payment; this will vary from franchise to franchise but, on average, it sits around 30 per cent. The challenge here is that the down payment cannot be financed; therefore, it’s important to keep this in mind when thinking about the overall franchise investment.
For a prospective franchisee, the Canada Small Business Financing Program provides an excellent financing solution. This is a loan sponsored by the federal government and given out by banks. If approved, you are eligible for up to $1 million for real estate or $350,000 for the purchase of equipment and leasehold improvements. With the Government of Canada backing the loan, millennials with an eye on franchising (or some other kind of entrepreneurial endeavour) have a stronger chance of securing the financing.
When looking for financing, it’s important to keep in mind what a lender wants to see. Credit history will be one of the first things a lender considers. Remember, personal credit is very important; keep on top of it by reviewing your history with one of the credit bureaus. If the credit history is good, the bank would then look at how much money the prospective franchisee has up front, whether it’s independently or from investors.
A comprehensive business plan is also important – this will give a snapshot of how the franchise is going to move its way to profitability. When developing a plan, ensure that it covers off the following five areas: management, markets, capital investment, cash flow, and profitability. These criteria are used to evaluate the business’s ability to generate cash, identify any potential threats to cash flow in daily operations and in the industry environment, repayment capability, and risks.
If securing capital up front isn’t an option, that isn’t the end of the road to owning a franchise.
Paths to ownership
The cost to ownership can be a tricky hurdle for some millennials looking to start their own franchise, but there are different options open to them.
Work, work, work, work, work: When looking to own a franchise, research should play a major part of the decision. It’s incredibly important to ensure you’re finding a franchise that you believe in enough to give it your full commitment. As a prospective franchisee, you could look for employment at the type of franchise that you are looking to own. This can be an incredible advantage; it provides a prospective franchisee an inside look at how the business is run. As well, for a younger Canadian, it provides a way to start building up and saving money for eventual ownership.
While this isn’t offered by all franchises, some will offer a work-to-own option. With this model, a franchisee would sell a percentage of the business. The major advantage here is a lower cost to getting a foot in the door. Typically, there will also be the ability to keep making investments in the business (and purchasing a higher share of ownership).
Strength in numbers: Finding a partner can be another great option. If there isn’t someone that comes to mind right away, you can always ask the franchisor if they have anyone else that doesn’t have the financing and may be willing to partner with you. Having a partner up front provides the benefit of splitting the cost of the initial investment.
Leaning on an external network may also be a solution. Look to friends and family and see if they would be willing to invest with you; they would be a capital partner and can earn their investment back as the franchise prospers and grows. With someone helping to fund the cost, it may also expedite the initial down payment.
There has been an upswing in millennials turning to franchising, and we shouldn’t expect to see this taper off anytime soon. For those with an entrepreneurial spirit, franchising is a great opportunity for business ownership.
Director, North American Industry Sectors, Franchise Finance
BMO Bank of Montreal (BMO)