As a franchise system Pre-Approved by the Elcano Franchise Fund not only is there the benefit of getting more of your franchisees financed quickly, there are also many other direct franchisor benefits.
• Marketing Advantage
• Increased Value from Franchisee Promotions & Assessments;
• More Funds for Franchise Growth;
• Brand Protection;
• Greater Ability to Control Failing Franchisees;
• Franchising Code Disclosure;
• Pre-Approval’s Valuation Benefit; and
• Apply for Pre-Approval.
The first and most obvious benefit to a Franchisor is the ability for its potential Franchisee Operators to know that on applying to join the Franchise a funding solution is in place.
In the most comprehensive report into Australian franchising the authors’ state that the second largest challenge constraining franchise system expansion is “Funding for franchisee’s initial purchase”.
Franchise Pre-Approval with the Fund will become a major marketing advantage shared with less than 5% of Franchisors in Australia.
Research suggests that as few as 5 out of every 100 candidate Franchisee Operators meets a Franchisor’s ‘personal assessment criteria’ for entrepreneurial spirit, business competence, marketing and sales skills and attitude.
Almost all will need finance to establish their business; many can do so by using their home equity and getting a non-customised loan from their bank. But as many as 2 of the 5 (40%) don't have the financial capacity to set up and sustain a Franchisee business because of a funding gap. That represents not 2% of candidates, but 40% of the only candidates that matter to a Franchisor.
Franchise Pre-Approval provides that funding solution and could almost double the Franchise’s conversion rate and the effectiveness of its Franchisee marketing and assessment budget.
It has been found that many Franchisors will provide some Franchisee funding through the balance sheet of the business. By removing the need for self-funding a Franchisor is able to use all the Franchisee Establishment Costs they are entitled to immediately upon the Franchisee joining the Franchise.
Risks associated with the funding of Franchisee Operators does not stay with the Franchisor, lowering (or at least avoiding any increase of) risks to the Franchisor.
The Fund significantly assists the Franchisor in brand protection in several ways:
• Each candidate Franchisee Operator turned away from the Franchise due to the ‘franchise funding gap’ talks to their networks, and even where their comments are not directly negative of the Franchise the fact that they tried and failed to gain entry can, inadvertently, be a poor reflection on the Franchise’s brand with other potential Franchisee Operators;
• Normally every Franchisee that fails damages the Franchise’s brand, however, where a Franchisee with an investment from the Fund defaults on its payments that Franchisee will fall under the ownership of the Fund and the Franchisor, acting on behalf of Elcano, therefore not failing even where the Franchisee Operator is removed from the Franchisee;
• Even where the Franchisee Operator might fail the Franchisee does not and therefore is not disclosed as a failed Franchisee to future candidate Franchisee Operators.
Whereby the Franchisee Operator’s business is failing, and unable to meet the obligations of the Fund’s investment into the Franchisee, and the Fund has taken greater ownership of the Franchisee Entity it shall appoint the Franchisor, under a joint venture agreement, as the manager of that Franchisee entity.
The Franchising Code requires, in accordance with Division 2.2 clause 10, that the Franchisor must provide to a potential franchisee, before entering into a Franchise Agreement, and any existing franchisee (clause 19) requesting such, a ‘disclosure document’ which (as per Annexure 1 of the Franchising Code) shall be inclusive of existing franchisee details including:
6.4 For each of the last 3 financial years and for each of the following events – the number of franchised businesses for which the event happened:
(a) the franchise was transferred;
(b) the franchised business ceased to operate;
(c) the franchise agreement was terminated by the franchisor;
(d) the franchise agreement was terminated by the franchisee;
(e) the franchise agreement was not renewed when it expired;
(f) the franchised business was bought back by the franchisor;
(g) the franchise agreement was terminated and the franchised business was acquired by the franchisor.
The Franchising Code definition for franchisee includes the following:
(a) a person to whom a franchise is granted;
(b) a person who otherwise participates in a franchise as a franchisee.
As such a Franchisee is the person (or entity) in receipt of the franchise (therefore that enters into the Franchise Agreement with the Franchisor). Any Franchisee in receipt of an investment from the Fund must be a corporate entity.
The terms of the agreements between the Fund, Franchisee Operator and Franchisor are such that in almost every instance whereby one of the above actions might normally result the effective same action may occur between the Franchisor and the Franchisee Operator but without impact on the Franchisee Entity.
A unique benefit of the Fund is that on the failing of a Franchisee Operator the Fund will gain control of the Franchisee Entity (as our own risk mitigation strategy of issuing penalty shares), resulting in the removal of the Franchisee Operator from the management of the Franchisee Entity.
The Franchisee Entity is likely to continue trading either under the management of the Franchisor or by sale to an existing or new Franchisee Operator.
As such, because the action would not result against the Franchisee, for the purpose of the Franchising Code, they are not items requiring inclusion in the disclosure document.
Furthermore, because the Fund is mindful of its own confidentiality it requires, in its Joint Venture Agreement, that whereby the Fund becomes the majority shareholder of a Franchisee, upon occurrence of any item listed at Annexure 1 clause 6.4 of the Franchising Code the Franchisor may not disclose the details of the Franchisee (such request being in accordance with clause 6.6 of Annexure 1 of the Franchising Code and therefore stopping the Franchisor from making such details available in the disclosure document).
From the most fundamental economic principle of supply and demand the value of franchise Pre-Approvals will grow.
This graph demonstrates the Supply of Franchise Funding Solutions through Franchise Pre-Approval (that’s the blue line at the bottom) and the Demand for Franchise Funding Solutions over the next 10 years (based on PWC’s projected 10% growth in franchise systems).
Access to a funding solution for a franchise should already have an impact on its valuation because those with ready access to funding for new franchisees have addressed the second largest impediment to expansion.
If you are a franchisor and would like to get the full details or to lodge your Application to become a Pre-Approved Franchise System please do so below.
Note: Fees, Terms and Conditions are all detailed in the Information Memorandum.