Franchisee Financing Programs

By Joseph Pisani

Canadian banks recognize that franchising is a significant contributor to Canada’s economy. They also realize that franchise financing represents an opportunity for them to continue to build their own business within a sector that has shown impressive growth and success for several decades.

Nevertheless, new franchisees entering this very competitive marketplace often find it a challenge when trying to arrange bank financing. In most situations, this is because the franchise concept is new to Canada or the network itself is small and not well known. In the majority of these situations and notwithstanding the fact that the financing request pertains to a particular franchise business, banks will rely primarily on the financial status and credit history of the franchisee (the owner) when assessing their financing request.

In addition, as with any new business proposal (franchise or otherwise), the bank is looking for reliable and realistic information to support any financing request. This is where the franchisor can play a major role in introducing the business concept to the bank by providing additional insight regarding their history, network standing, growth plans and performance expectations.

Some franchisors have and continue to take the opportunity to provide their prospective franchisees with information, but this is often limited to their Franchise Disclosure Document. Beyond this, franchisees are left to fend for themselves. Additionally, not all franchisors elect to take an interest or assist their franchisees in preparing their application for the bank. This is most certainly their prerogative but in doing so, there is potential risk. The franchisee may not be aware of or be able to convey key information regarding the franchisor, network success and other attributes of the system that may add value to the overall proposal. This “risk” is particularly prevalent with new or emerging systems where the bank has limited historical information available to them.

At BMO, each franchisee is considered for all intents and purposes a reflection of the franchise network and the franchisor. Consequently, the quality and accuracy of a franchisee’s financing request will have an impact on the bank’s receptivity to the proposal at hand and quite possibly any future proposals. Some of the more critical questions the bank will pose to the franchisee include:

  • What attracts you to this franchise?
  • Are you sure of the total capital costs involved in establishing the franchise? Any possible additional costs?
  • Have you seen/reviewed the Disclosure Document? Have you engaged Legal Counsel?
  • What are you getting in return for your franchise fee?
  • What is the franchisor doing to help you get started?
  • How did you choose the location? Who negotiated the lease – head lease or sub-lease?
  • How realistic are your business projections and what assumptions were applied (sales, costs, profitability, etc)? Who prepared the projections?

Franchisors should also encourage prospective franchisees to liaise with their respective banks and obtain their various publications/guides which focus on developing and submitting a business plan. There is also benefit to the franchisor being aware of the material content of these publications to assist their franchisees as opportunities arise.

The above comments are generally applicable to individual proposals that arise from time to time. However, assuming it is the franchisor’s intention to grow the network regionally or even nationally, there is a more significant step to consider which may lay the groundwork for building a strong franchise banking relationship and potentially a national Financial Services Program for their franchisees. Very simply, introduce your franchise system to the bank.

All the major Canadian banks have established a head office team whose primary attention is directed towards franchising business. These teams focus exclusively on franchising, providing customized programs and financial solutions to assist franchise systems with all their banking needs. They are also a key liaison point and primary information source for their Commercial Lenders (Account Managers) located across the country.

Introducing your franchise system to the bank serves two specific purposes; both of which will ultimately help in establishing franchisee financing arrangements and in ensuring the bank’s familiarity with the business in its entirety.

First, you should identify the bank’s contact point within their Franchise Department and arrange for a meeting to discuss the matter in greater detail. When these discussions commence, you should have two initial objectives: ensuring the bank is provided with as much information as possible regarding the network, and concurrently identifying what level of banking support and services may be available to assist franchisees.

The extent of material and information available for the bank will vary from one franchise system to another. However, there are a number of key areas which should be addressed when introducing your franchising business to the bank:

Business overview:

  • Outline the franchise concept and your development plans
  • Provide evidence to support franchise viability (similar business concepts, results from corporate store operations, etc.)
  • Any insight into consumer demand for your product or service
  • Address what market research has been conducted regarding growth opportunities, existing competition and any challenges to entry

Franchisor’s track record:

  • New business concept, master license agreement, international subsidiary, etc.
  • Length of time in business and results to date
  • Management team and their experience
  • Franchise infrastructure
  • Results from existing company owned locations
  • Current financial standing (copy of recent company financial statements)

Legal Agreements:

  • Franchise Agreement and Disclosure Document
  • General overview of criteria including franchise term, operating guidelines, on-going franchisee reporting criteria and performance monitoring of franchisees

Profile of a Franchised location:

  • Total cost to establish a franchise location (small, medium and large establishments if appropriate)
  • Breakdown of specific capital costs/capital outlay including franchise fee, equipment, leaseholds, all pre-opening expenditures and working capital requirements
  • What does the initial franchise fee cover?
  • Site selection criteria
  • Location set-up: is it turn-key? If not, who arranges for site construction? Who monitors the costs?
  • Lease terms: head lease or sub-lease? Any landlord inducements?
  • Supplier details and terms (if applicable)

Franchisee Selection Criteria:

  • Previous business experience prerequisite
  • Training by franchisor (where, by whom and what is included?)
  • Minimum personal net worth and minimum cash capital requirement
  • Operating expectations – on site owner/operator required or absentee ownership permitted?

Franchisee Financing:

  • To what extent is the franchisor involved in helping the franchisee develop their business plan and/or financing request?
  • Any direct financial assistance provided by the franchisor?
  • What, if any, additional support would be offered to the bank as part of the franchisee’s financing arrangements (e. g. Letter of Comfort, Inventory Buyback, guarantee)?

Franchisee Performance Monitoring:

  • Franchisor monitoring/reporting requirements by the franchisees, particularly during the first year of business
  • How engaged is the franchisor in ensuring the franchisee’s business performance is on track with initial projections?

For a new franchisor and franchise system, the most significant challenge continues to be the financial model – preparing business forecasts regarding sales, margins, operational costs and net income numbers. In contrast, established systems and their respective new franchisees are able to use historical network results from similar existing locations when preparing their own financial forecasts. While obviously not a guarantee that similar results will be achieved, the bank will take this historical information into consideration.

A new franchisor and/or a new franchisee will find that the bank will require more information to substantiate the numbers contained in any financial proposal, or at the very minimum, further elaboration as to what criteria was used to determine them. While it is understandable that a franchisor wishes to avoid making any guarantees or assurances to either their franchisee or the bank regarding financial projections, there is a potentially greater risk if franchisees are left on their own in this regard.

In most new franchise proposals, the franchisee will not have the level of expertise or insight necessary in order to develop a comprehensive financial plan. Without the franchisor’s guidance, the risk is that the franchisee’s plan could very well be incomplete or overly optimistic in terms of revenues, costs and projected bottom line. Consequently, several weeks or months may elapse before both the franchisee and the bank realize that actual results are falling well below projections and the overall viability, if not survival of the franchise, is in doubt. From the bank’s perspective, concerns immediately arise concerning risk and debt servicing obligations. Furthermore, are the problems being encountered unique to this specific franchisee, or are they representative of the network at large? Importantly, if these concerns are not addressed, there is a strong possibility that it will impact the bank’s level of receptivity to any future franchisee applications.

The second primary purpose for introducing your franchise system to the bank’s Franchise Department is that the information you provide to them will often assist the bank in evaluating any franchisee financing proposal, regardless of their location in Canada. Local Account Managers will often dialogue with their Franchise Department for additional input and guidance, particularly when the network is not well known. This is your opportunity to provide the bank with any and all information you consider vital to the bank’s assessment of a specific franchisee proposal and the network at large. Importantly, such information will be held internally in order to respect your proprietary aspects and confidentiality.

In conjunction with your introduction to the bank, it is important to identify the bank’s initial level of receptivity and to what extent they may be able to assist you and your franchisees. Identify what loan facilities may be available and their parameters, as well as other business banking services appropriate to your business format. Initially, due to the limited size of the franchise network and nominal information regarding the historical performance of your franchisees, it is unlikely that the bank will be in a position to establish a formal program.

However, this would be a common objective for some time in the future and would be predicated on a number of factors, including:

  • Number of existing franchised locations (25 would be a good starting point upon which to draw supporting financial data)
  • Consistency of franchisee financial needs, market receptivity and overall business performance
  • Projected network growth/expansion
  • The bank’s experience in dealing with individual franchisees
  • Overall risk evaluation, including the competitive environment and prevailing bank policy
  • Overall financial standing of the franchisor

In summary, the level of receptivity by the bank to financing new and/or emerging franchise systems will rest primarily with the quality of information submitted by both the franchisor and prospective franchisee. It is incumbent upon you (as the franchisor) to ensure all relevant material pertaining to and in support of your business format is conveyed to the bank. Taking an active role as a franchisor in establishing and building the banking relationship is paramount to creating a strong franchisee base and overall network growth.


About the writer

Joseph Pisani is the Manager, National Franchising Services with BMO Bank of Montreal. He and his team are responsible for the bank’s franchisee financing arrangements and are the primary liaison point for all franchisors across Canada. He may be contacted at (416) 927-6025 or email For further information you may also visit

The opinions or viewpoints expressed herein do not necessarily reflect those of the Canadian Franchise Association (CFA). Where materials and content were prepared by persons and/or entities other than the CFA, the said other persons and/or entities are solely responsible for their content. The information provided herein is intended only as general information that may or may not reflect the most current developments. The mention of particular companies or individuals does not represent an endorsement by the CFA. Information on legal matters should not be construed as legal advice. Although professionals may prepare these materials or be quoted in them, this information should not be used as a substitute for professional services. If legal or other professional advice is required, the services of a professional should be sought.