When dealing with prospective franchisees, I always try to minimize their personal exposure so that if the venture fails “ma and pa” don’t lose their house, their farm, their RRSPs or their shirts.
One spouse can take the risk and become the sole director and shareholder of the company that’s created to enter the franchisee agreement, while the other spouse has no formal involvement, and therefore should not provide any guarantee for the business.
Another approach is to try to eliminate or cap the personal guarantee the principal director or shareholder will be asked to give the franchisor, either through a flat monetary cap, or an amount that goes down each year.
I’ve written about this before, but how might prospective franchisees cap the personal guarantees they normally have to offer the banks to finance the ventures?
Speak to your bank or credit union about the Canada Small Business Financing Program (CSBFP), a loan- and loss-sharing program between the federal government and banks, credit unions and other commercial lenders from across the country. It’s been in operation since 1961, and it used to be called the Small Business Loan Program. Financing of up to $350,000 is available to put toward leasehold improvements and equipment, and up to $500,000 for property.
CSBFP was set up to increase the availability of funding for establishing, expanding, modernizing and improving small businesses, and for capping the exposure of the personal guarantors of the loans. Many prospective franchisees don’t know the program exists.
An “eligible small business” has annual revenue of $5 million or less. Ineligible businesses are in farming, not-for-profit organizations or charitable organizations. The CSBFP is well suited to “bricks and mortar” franchised businesses, which accounted for 16 per cent of the total value of the loans registered under the program in 2011.
Loans can be used to finance up to 90 per cent of the cost of purchasing or improving land (in other words, the real property your business will be operating out of), purchasing new or existing leasehold improvements, or buying or upgrading new or used equipment. They cannot be used for the aquisition or licence of goodwill represented by a brand or trademark, for your working capital, for inventories, franchise fees, advertising fund fees, legal and accounting fees, research and development, or anything else that might be characterized as “soft costs.”
To read the full article on small business financing – Click Here – Tony Wilson – Globe and Mail – July 17, 2012