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Cash is king

cash is king in franchising

If you're looking for a franchise that requires premises,make sure you understand the cash flow implications of taking on a lease. Robert Dick explains

In the last few years reductions in commercial property rents in many parts of the country have offered more choice and/or better locations for commercial business tenants. However, without understanding the total cost and particularly the cash flow implications of taking on a lease, new businesses can still find themselves needing more funding in the first few months of trading. Banks have never looked favourably on borrowers requesting additional funding at this early stage and, in the present climate, many tenants are being refused.

Franchisors should be able to accurately predict and include sufficient contingency in their revenue and business cash flow models. However property-related expenses will often form a significant part of the cash requirements in the first three to four months of trading. Unless cash flow models are updated as lease negotiations progress, significant short falls can occur.

How much difference can there be?
Often the emphasis in lease negotiation is on annual rent, to the exclusion of many equally important cost elements.For example, the difference in cash flow in the first six months of trading between an annual rent of £24k and £20k is only £2k. However cash flow models for properties with annual rents of £20k can have differences in cash requirements (just for property costs) in the first six months of trading of up to £20k.

Similarly for properties with annual rents of £50k per annum cash flow differences of £50k are not uncommon. Clearly getting the model wrong can have catastrophic consequences on the business.

Areas that materially affect cash flow?
Rent-free periods, deposit payments and monthly rather than quarterly rental payments are the obvious ones but length of lease and professional fees can have a surprising impact on cash flow.

The effect of VAT needs to also be recognised. Knowing if the property is VAT registered is clearly important. Not only because of the effect on rental payments but that any deposit will likely include VAT and the amount of Stamp Duty Land tax (SDLtax) payable is calculated on rent payable including VAT.

The effect these various terms have on the cash flow should not necessarily be the deciding factor in negotiations,but they should be considered very
carefully in conjunction with the other business requirements.

Landlords will all have different priorities in a lease negotiation, depending on their own personal circumstances. With falling rents, many are increasingly being driven by funding restrictions. Consequently some may be increasingly amenable to reduced deposits or accepting personal guarantees in exchange for a tenant accepting the ‘reduced' asking rent.

Presenting your prospective landlord with a professional looking document detailing the history of the franchise, training and back-up given and it's franchisee success rate will improve your negotiating position on security required. Your franchisor should have this type of document or at least be able to help you put one together.

If cash flow rather than the absolute rental figures is your major issue the offer should be constructed to reflect this. Remember - it's often not all about
the rent!

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