Will 2013 bring green shoots of growth?

Throughout 2012 franchising proved to be a popular route for those looking to start their own business. Senior Manager of Ulster Bank, Orna Stokes looks forward to the coming year and identifies the business sectors that continue to thrive

As we start 2013, Ireland’s press is reporting signs of optimism – whether it’s the statement from the Minister for Finance, Michael Noonan ,that confidence is coming back into the Irish economy; a recent Exchequer report that the tax take for 2012 was up 7.7 per cent compared to 2011 or the findings of the Vision-net Business Barometer that although an average of five companies per day failed in the month of November 2012, this represented an improvement of 20 per cent from the same period in 2011.

The Vision-Net Business Barometer also reported that while company start-ups in the first 11 months of 2012 were down 4 per cent on the same period in 2011 (12,884 v 13,368), company closures dropped by 7 per cent (11,486 v 12,340) during the period, resulting in a slight expansion in the number of companies operating.

Are these green shoots of growth in the Irish economy? As we move through 2013, time will tell. We do know that while exports performed strongly in 2012, businesses servicing the domestic market in Ireland have continued to operate in a challenging environment. We have seen a lot of people re-evaluating their options for how to earn a living, and franchising is one of the routes to business ownership under evaluation.

As 2012 evolved, we saw a wide variety of people consider the franchise route as a way to set up a business – these would-be business owners bring with them a diversity of business experiences from across the business spectrum, but may wish to marry their business experience with the range of supports a robust well-run franchise model can provide to the would-be entrepreneur.

The sectors people are interested in are diverse, but continue to be influenced by the world we live in. The emphasis continues to be on selective use of discretionary income - consumer focus is very much on getting value for money, extending the life of things already owned, and paying for must-haves rather than nice-to-haves. As a result, interest in franchises such as car repairs, carpet or upholstery cleaning and clothing alterations is strong.

When people are eating they are looking for value-for-money and tend to be ‘deal conscious’. This suggests good opportunities for well-run casual dining franchises, where effective central or bulk buying can combine with quality and service delivery.

The ‘bottom line’ remains the key focus of business owners, businesses are on the look-out for cost-effective ways to outsource services – so interest in franchises that provide virtual office services, outsourced printing or outsourced delivery services remains strong. A key consideration is that the franchise pilot must demonstrate there is sufficient ‘share of wallet’ for both the franchise owner and franchisor, at realistically priced business levels.

As consumers shift to doing business on the internet, opportunities arise for businesses with effective online platforms. Franchise brands that service online companies, for instance, by providing local delivery services, continue to benefit from this trend.

Whichever sector you choose, the calibre of the franchisor is very important. If you are considering buying into a franchise brand, you need to take independent legal and financial advice, before committing yourself to your investment.

When choosing a franchise make sure it:

  • Is a well-established business with a history of making profits – existing franchise owners should be generating cashflow and profits.
  • Has an experienced management team, who provide skills, mentoring and supports to help the franchise owner start the new business.
  • Offers effective training and supports for franchise owners.
  • Demonstrates the business can be copied successfully and has a successful pilot and satisfied franchise owners.
  • Is governed by a Legal Franchise Agreement, developed by a reputable franchise lawyer.
  • Offers a wide enough profit margin to allow both franchisor and franchise owner share in the success of the business.

In franchising, as with any other start-up, would-be business owners should expect to commit their own cash and assets to support their new business as well as borrowing from a bank. The amount you can borrow, will essentially come down to two basic issues.

Firstly, what percentage of set-up costs you can personally fund – as a general rule of thumb, a franchise owner would expect to invest cash to cover one third of the costs of set-up and any expected losses, before the business starts to make profit.

The second consideration is how much cash the business needs to generate to make repayments on borrowings. If the business is not projected to make enough cash to make the loan repayments, with a margin for error, then the business cannot afford the debt.

Your business plan will be key to your successful application for bank debt. It should include a cashflow projection, which will outline how much cash the business is expected to generate. Your cash flow projections should be sensitised to show what could happen if the business is slower to get off the ground than you anticipate, or if costs are higher than you expect.

At Ulster Bank we welcome the chance to have an initial chat before you invest your time and money in developing a business plan, with your financial advisors.

When Ulster Bank is considering a request for finance – whether it is a proposal for franchise owner finance or for a stand-alone business - we typically focus on five fundamentals – ‘the 5 C’s’.

Character The borrower’s personal qualities
Capital The spilt between equity (the money put in) and the debt (money borrowed)
Collateral The security given to the bank for protection of the loan
Condition The assessment of the current economic market
Capacity The ability to repay the credit facility

The involvement of a well-established, reputable franchise, which has a proven track-record in opening and operating successful, profitable franchise owner outlets, can offer comfort about the capacity of the new franchise outlet to make enough money to repay the credit facility.

Developing a Business Plan will very much be a collaboration between the prospective franchise owner, the financial advisors and the franchisor, who can provide guidance on the business assumptions used, based on the performance history of other franchise owner outlets in the franchise network.

Ulster Bank offers a very competitive package for franchise and start-up customers. Ulster Bank’s Start-up Business Loan rate of currently 4.1%* variable is available for Start-up Loans up to €70,000, while loans of up to €30,000 can to provided for new business development purposes without need for personal guarantees to be backed by assets.**