Financial needs through internal and external sources of finance.

Financial resources are a critical and vital part of any organization. An
organisation can manage their financial needs through internal and external sources
of finance. “Internal finance” is obtained from the business itself, and “External
finance” is obtained from sources outside of and separate from the
business. 

 

Source: (Cunningham, 1980)

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Starting a
franchise requires finance to buy the rights to operate as a franchise, lease/buy
equipment, hold inventory, business growth, etc. Opening a KFC franchisee outlet requires a lot of finance at the start. KFC requires franchisees to have:

§  Net worth of $1.5 million and liquid assets worth $750,000.

§  KFC charges
its franchisees a franchisee fee of $45,000.

§  Building and
equipment (grills, fryers, etc.) cost about $0.7 – $1.2 million.

§  Other fees, including
training and property costs, takes the total start-up cost to about $1.3 – $2.5
million.

§  Franchisees
also need to pay KFC fees on regular intervals towards royalty and brand advertising.

 

Listed below are some sources of finance to help open a KFC
franchisee:

1.       
Franchisor Financing Options

Approaching the franchisor is generally the 1st option when
seeking funding. Many franchisors offer some form of debt financing, or offer
financing plans for leasing equipment and operational costs.  KFC’s parent company “YUM Brands” offers 3 financing options as listed below:

a.       YUM Capital
Financing Program: This covers construction of new KFC franchise outlets,
buyout of existing KFC outlets, and upgrading of existing outlets. The maximum funding
that can be given to a franchisee is $5,000,000, and the minimum funding is
$200,000.

b.      YUM Minority
Lending Assistance Program: This program provides financing for ‘minority’ franchisees buying an
existing KFC Outlet, or purchasing an existing KFC-owned outlet, or creating a new
outlet. YUM guarantees 25% of up to $12,000,000 of the principal of the
franchised business loan, and up to a maximum amount of $3,000,000 per franchisee.

c.       Wells Fargo
Equipment Financing Program: This financing program has been arranged through
Wells Fargo Equipment Finance, Inc., through which Wells Fargo will extend
credit to certain KFC franchisees for a limited period.

2.       
Conventional Banks and Credit Unions

The main advantage of approaching a bank or credit union for funding
is that they will recognise the benefits of associating with a KFC franchise rather
than an unknown start-up. Banks will expect the franchisee to have their credit
in order, have a detailed business plan in place and expect a minimum 20%
contribution towards franchisee equity.

3.       
Small Business Administration (SBA)

Loans from SBA are available for franchisees on meeting certain
criteria. Apart from a longer repayment schedule, SBA loans also offer lower
down payments when compared to conventional bank loans. This is an appropriate
option for those franchisees just starting out with a new business venture.

4.       
Business Partners

It may need 2 or more entrepreneurs to join hands to open a KFC franchisee.
Choose business partners who can bring in financial capital and have the
skillsets to operate a business. Another option is to find a venture capitalist
or angel investor who can provide the starting capital.

5.       
Owner’s Savings

The franchisee owner
can use his savings, or sell of existing investments in stocks, bonds and real
estate to provide the money to finance the franchise or provide equity money
towards a loan offered by a bank / lender. If the franchisee owner is already
in business, then retained profits, sales of surplus
and non-performing assets and reducing inventory levels will also be a good
source of finance.

6.       
Borrowing from Friends and Relatives

A major advantage of seeking funds from friends and family members
is that providing collateral can be avoided. Easier repayment plans and
interest terms can also be worked out.

6.0         LEGAL AND ETHICAL ISSUES

For past many decades, fast food companies have been severely criticized
for their animal welfare record and their links to health,
obesity and
adverse environmental impact. Some of the legal and ethical challenges faced by
KFC are listed below:

§  KFC entered India in 1995 and has been in midst of
controversies. Authorities found that KFC’s chickens did not adhere to the
Prevention of Food Adulteration Act, 1954 and exceeded the MSG (a flavour enhancing ingredient) limits
by 3 times.

§  Since 2003, PETA (People for the Ethical
Treatment of Animals) has been protesting KFC’s choice of poultry
suppliers worldwide. PETA have held several demonstrations, sometimes in
the home-towns of KFC management, and during 1 such instance, KFC CEO David
Novak was soaked in fake blood by a PETA protester.

§  In 2006, KFC-Europe was accused by Greenpeace for
procuring soya
bean for its chicken feed from Cargill. Cargill has been accused of growing
soya-bean crop by clearing large portions of the rainforest in Amazon.

§  In 2010, KFC-Australia was accused of racial insensitivity over
a TV advertisement that showed a white cricket fan
handing out fried chicken portions to appease a group of black skinned supporters
from West Indies.

§  In 2012, KFC was accused by Greenpeace of procuring paper
pulp for its food packaging material from Indonesian rainforest wood. Thereafter,
KFC has put a plan in place to ensure that all its suppliers provide
packaging material from sustainable sources.

§  In December 2012, KFC was criticized in China when it was found that a good
no. of KFC suppliers used growth
hormones and excessive antibiotics on
its poultry, thereby violating Chinese law.

§  In 2017, KFC was fined £950,000 after 2 workers received burns due to boiling
hot gravy. KFC admitted to charges of failing in its duty of care to personnel,
and was ordered to pay fines of £800,000 and £150,000 by a Teesside Crown Court.

§  In 2017, KFC had to pay $1900 to journalist, who was beaten up by a
security guard of a KFC outlet in Budapest, Hungary. Protests broke out
and the bad publicity pressurised KFC to act. KFC reacted by firing the
security guard and paid the amount to the journalist.