At the end of a franchise term or lease, it is common for a business to undergo a refurbishment. This is to ensure the franchise brand is represented in the best way and keeps shopping centre managers happy as well. Franchise Buyer speaks to CFI Finance director James Scurr about finance options when it comes to refurbishing your franchise.
Franchises typically undergo a refurbishment when a lease or franchise term expires, which is usually between 5 and 7 years. This can be anything from a coat of paint to a complete fitout, as franchisors continually upgrade their image. While this can be beneficial for a franchisee, it can also be costly, and according to CFI Finance director James Scurr, it is important to do your research before signing up for finance. “When a refurbishment is approaching, franchisees need to consider how they are going to fund the cost,” James says. “The most obvious ways to do this would be using the business’s cash reserves or cashflow, applying for a bank loan or using other funders who specialise in franchise equipment and fitout finance. Or, it may be a mix or variation of all of these options.”
Franchisees need to account for the cost refurbishments throughout the term of the lease, according to James, who says it is unusual for franchisors to fund the refurbishment themselves. “Nearly every franchise agreement I have ever seen has a provision for the franchisee to undertake a refurbishment at some point in time,” he says. “This is a cost that the franchisee needs to budget for, as it would be very unusual for a franchisor or landlord to contribute to the refurbishment cost. Although I have worked with a client before, where a small sum was being contributed to the refurbishment by the franchisor, this is definitely not the norm.” James says that while turning to a bank to finance, a refurbishment may be common; it has positives and negatives.
“In a lot of instances, a bank may be able to offer the best interest rate, but the rate is just one consideration you should assess when looking at your options,” he says. “It’s no good getting a loan for the lowest possible rate on a product that doesn’t suit your business’s circumstances.” “Like any application for finance with a bank, be ready to provide a lot of supporting information for your loan to be assessed. I see many clients coming through my business for the simple reason that they see the requirements of their bank as too onerous, and they just want a fast, simple solution.”
“If you are looking for funding for a franchise refurbishment, then chances are you previously had a bank loan to fund the initial purchase. If this is the case, then it is probably paid out or close to being paid out in line with your lease or franchise agreement renewal.”
“Some franchisees may feel a little relief that their home is no longer on the line as security for the bank. Other specialist equipment and fitout funders may not require you to put your home up as collateral, so this may be a more appealing option for franchisees.” However, interest rates and security are not the only two factors to consider when researching finance options, says
“Franchisees need to choose a funding solution that best suits their needs. They need to take a number of factors into consideration like if and when they plan to sell the business,
tax advantages of the different types of funding products, profitability of their business and flexibility of the various funding products, to name a few,” he says. “For example, an instalment loan from your bank may offer the lowest repayment, but its tax advantages are limited when compared to, say, a rental or operating lease where typically the entire repayment is a 100% tax deductible expense of the business.”
“Similarly, if you are considering selling your business in the near future, then you may want a more flexible product that can easily be assigned to your prospective buyer. This can even assist in selling the business by offering the prospective franchise an avenue for taking over the contract, hence reducing the amount of capital they may need to come up to purchase the business.”
“There are lots of scenarios to consider, so my suggestion would be to call a few funders to get quotes and information on the products offered, and then if you feel you need a better
understanding of the options, then speak with your accountant.”
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