Motivation

We began investing in franchises as a means to reduce some of the risks involved in starting a new business. We already had significant experience starting small ventures and are aware of the value that an established brand name, proven operating system, ongoing support and, in certain cases, national purchasing power can provide.

We see significant social benefits in investing in franchises as well. Working with an established business formula will allow our businesses to grow profitably while continuing to hire employees from a target community. Ongoing support and training provided by franchisors fits with our desire to provide skill development opportunities for the employees of our portfolio companies.

Our franchise financing strategy does not replace our work with more “traditional” social enterprises. It simply provides us with another avenue that we hope will help make the concept of social enterprise more mainstream in Canada.

Financing details

The maximum amount of financing available from SCP is $300,000 per franchise but the actual amount will vary depending on the needs of a particular franchisee. The critical component is that any franchisee receiving financing from SCP will be required to hire at least 50% of his/her employees through community programs that help those facing employment barriers.

We can provide subordinated debt to finance most of the “unencumbered” capital required to purchase a franchise. This type of financing is generally difficult for franchisees to secure because banks will not provide loans for this purpose.

Our financing will be structured as subordinated debt so that it can be viewed as equity by more senior lenders. Our interest rates will be calibrated relative to traditional small business loans and the term of the debt will be tailored to the projected cash flows of the business (likely 5 to 7 years). There will also be an assortment of other covenants (e.g. personal guarantees, adequate financial reporting etc.).

Target franchisees

We envision two types of entrepreneurs who would qualify as potential franchisees.

The first group is entrepreneurs who have the necessary management and people skills to operate a franchise but who need help financing the acquisition. These individuals must also possess a strong willingness to embrace the social mission.

The second group is recent immigrants to Canada who have displayed entrepreneurial and management capabilities in their homeland before arriving in Canada. This brings an added social dimension to our franchise program because many new immigrants have the requisite skills and work ethic to become successful franchisees but lack the credit history, networks, or access to capital that would allow them to qualify. Our financing program can eliminate structural barriers.

Benefits to franchisor

We believe that there is a clear opportunity for SCP and our target populations to benefit from this franchise financing strategy – but it is not a one-way street. A franchisor will also benefit from a relationship with SCP:

• Access to SCP financing will help franchisors expand their network while ensuring that a franchise is fully supported and appropriately capitalized.
• Our financing program will provide a vehicle for franchisors to grant franchises to individuals who have all the necessary business and personal qualities but lack the unencumbered capital. For instance, franchisors could potentially award a franchise to a successful manager of a company-owned store who would not otherwise have the financial net worth to become an “owner”.
• We believe that the franchisor will benefit from positive public sentiment. Social Capital Partners and its portfolio organizations have been featured favourably on CBC’s Venture, in the National Post, the Globe and Mail, The Toronto Star, and several other local and national publications.
• Our partnership with the YMCA and other dynamic community organizations, in addition to our own experience in establishing appropriate social support infrastructure in the social enterprises we fund, allows us to ensure that people hired in the franchises are properly screened, trained and supported. This will permit the franchise owner to concentrate on the business aspects of building a successful operation.

As with all of our portfolio companies, we provide ongoing strategic and management support to help to ensure that the franchise is a success.

Challenges

As with all creative ideas, there are some potential pitfalls that SCP will have to avoid. We see three particularly important challenges in this case.

The first is that franchises often operate in sectors that do not provide ideal job opportunities or remuneration for employees. SCP will avoid franchises that provide less robust job opportunities or do not ensure the target population being employed is appropriate for that job. For example, a job in a fast food restaurant may be inappropriate for skilled immigrants looking to integrate into the Canadian job market but may be a good opportunity for at-risk youth looking to develop basic employability skills.

A second concern is that a franchisee financed by SCP may face mixed incentives. On one hand the franchisor will demand business performance in line with other franchise units while on the other hand SCP will put pressure on the franchisee to execute effectively on the social mission. To mitigate this potential conflict we will provide assistance to franchisees around hiring and training their target employees. Much of this assistance will be provided in cooperation with community partners such as the YMCA. We will also help to create a positive and competitive work environment by providing technical and monetary support for programs such as emergency loan funds, employee savings programs, education bursaries, and financial literacy courses.

An additional concern is that some communities (particularly smaller ones) may be wary of the effect that franchises have on local owner-operated businesses. It is important to note that in most cases our franchise operations will be in larger urban centres where these concerns are not as acute. In all cases, we will work hard to minimize any potential conflicts with local community members.