How does the financing of a franchise purchase work?

The entry fee also covers the costs associated with what is known as onboarding – the initial training and introduction to the franchisor's business model. However, this fee is not the only expense when starting out as a franchisee.

Depending on the franchise system's business model, initial inventory, vehicle or workshop equipment, or shop fitting may also need to be financed. A particularly important consideration is setting aside sufficient funds to cover the period until the business becomes self-sustaining. These start-up costs depend heavily on your own monthly financial requirements. This figure must then be multiplied by the number of months that, based on experience, are typically needed for a given franchise system to reach the point where income exceeds expenditure.

The start-up costs can easily match or exceed the amount of the entry fees.

A special case is what is known as "franchise succession", where an existing franchise business is taken over. While goodwill payments must be made for the assets acquired, start-up costs are generally not applicable.

It is rarely the case that one simply has the required funds sitting in an account, which means external financing is usually necessary. In this regard, the franchisor plays an important role. Having already gained experience with many franchise start-ups, they are well placed to pass this knowledge on to new partners.

Alongside a pre-contractual disclosure obligation, legislators require the preparation of a business plan in order to establish clarity about the necessary funds and their sources before entering the franchise system. To this end, the franchisor typically provides a template that prospective franchise partners complete with their individual figures.

It is very important that prospective franchisees complete the business plan themselves and fully understand every section of it – only then will they be able to present it convincingly at a later stage. A business plan is not merely a legal requirement; it is the essential foundation for securing bank financing.

A business plan allows you to share your business idea with business or financing partners in all its facets. It should therefore be written in a way that enables interested readers to understand and assess the business idea without difficulty.

Of particular importance here is plausibility, as bank employees generally have no detailed knowledge of the specific industry of prospective franchisees, nor do they have the inclination to work through lengthy texts.

That is why the challenge of writing a good business plan lies in describing the company to be founded in a concise, compelling and credible way — while also presenting it in a manner that is easy to understand.

As mentioned, it is important to speak with the franchisor about their experience and any financing options they may offer. Some franchise systems work with specialist banks that are already familiar with the system and can serve as a solid foundation for launching a new business.

If no such special banking arrangement exists, prospective franchisees will need to find a financing partner. If you already have an existing banking relationship, that can be a good starting point.

It has also proven helpful to get in touch with existing partners within the franchise system and find out which banks they work with – and, more importantly, which specific contacts at those institutions they deal with. These contacts will already be familiar with the franchise concept, meaning you won't have to start from scratch when presenting your own financing needs.

The Kreditanstalt für Wiederaufbau (KfW), Germany's national promotional bank, plays a particularly important role in financing franchise start-ups in Germany. It has established various subsidised funding programmes to support self-employment, with the acquisition of a franchise explicitly taken into account.

Those seeking credit should be prepared for the fact that financial institutions may promote their own products in order to generate higher returns than they would from processing a KfW funding application. Ultimately, however, the bank's terms must align with those of KfW, and prospective franchisees can use this to their advantage when negotiating with their lender.