The Franchise Test

Franchising is often sold on certainty: a recognised brand, a proven system, a business model already tested elsewhere. But from a lender’s perspective, the calculation is rarely that straightforward. Behind every franchise agreement sits a more complex question about risk – not just whether a model works on paper, but whether the people behind it can make it work in practice. As Head of Franchising at Lloyds Bank, Suki Dehal spends much of his time assessing exactly that balance. In conversation with Entrepreneur UK, he discusses what lenders really look for in a franchise business, why some sectors prove more resilient than others, and how the relationship between banks and franchising has evolved beyond simple replication and scale. 

How does franchising compare to independent businesses from a lending and credit risk perspective?
When assessing franchise proposals we have the benefit of reviewing performance from existing franchisees in the brand to give greater confidence in the viability of projections. Generally speaking franchisees can benefit from the economies of scale and we have seen that brand awareness enables businesses to grow at a faster trajectory than an independent counterpart.

What key factors determine whether a franchise is considered bankable by lenders like Lloyds?
When reviewing the viability of a franchise model there are numerous factors that come into consideration. Firstly we will review if we have any connections already banking with us from that brand and how they have performed with us historically. In addition to this we would review the legal agreement to ensure it is in line with our environmental and social policies and if the advisors that have supported the production of the model are approved members of the British Franchise Association. We would also look to review the performance of both the original franchisor business and any pilot operations to confirm viability  of the business.

What financial characteristics do the most fundable franchise models typically share?
Typically the business will need to demonstrate that they have a recognisable brand and system that can be replicated. Secondly the franchisor will need to demonstrate that they have the capability to sufficiently train and support franchisees to be able to deliver their model. Finally the financial performance of the business needs to demonstrate sufficient margin to franchise and opportunity within a territory to replicate success seen in historical sites.

Where do you see the biggest risks in franchise lending – cashflow, scalability, or franchisee performance?
The main risk we see from well established franchise models is in the selection of franchisees. This can be seen more often with newer franchise models and proper consideration of the key skills needed to invest along with personal contribution towards the set up costs to demonstrate a shared risk and clear motivation to succeed. Whilst having some support from family and friends isn’t prohibited, it’s important to understand a franchisee’s demonstrable success in their career to date to give greater confidence in their ability to run a franchise business successfully.

How does Lloyds assess first-time franchisees versus experienced multi-unit operators when making lending decisions?
Largely the fundamentals of the assessment remain similar as we will in both instances be looking to ensure that the franchisee has the capability to operate the model and sufficient opportunity to compete effectively within their territory to generate sufficient profitability for repayment. The added benefit a multi-unit franchisee will have is that capability can already be proven if they are looking for a 2^nd or subsequent location with the same brand. This will also have the added benefit of additional cashflow for debt servicing from existing businesses that can further strengthen a proposal.

Which franchise sectors currently show the strongest resilience from a credit performance standpoint?
Whilst we don’t have a specific sector that is most favoured, we are currently seeing a large proportion of opportunities in both domiciliary care and food & beverage sectors where a number of new providers have entered the market in recent years, along with an increasing re-sales market for franchisees to realise their investment upon exit.

About Suki Dehal
Suki Dehal has worked for LBG for 16 years across various commercial banking roles supporting SME businesses. Within that time the last 10 years has been exclusively working within the Franchising Sector and heading up the Franchise Unit since 2021. The role involves working with franchisors of all sizes to establish the banks appetite to support and then helping prospective franchisees to raise the funding needed to invest in their franchise ambitions. Alongside his role in the bank Suki has sat as a NED with the British Franchise Association supporting ethical UK franchising and ran his own Franchise Business in partnership with his wife as franchisees.