expert advice: Kate Groom | Co-founder and Director | Franchise Accounting and Tax
How to avoid a costly mistake when you buy an established franchise An established business can be a good option for a franchise buyer, but it’s possible to make an expensive mistake and pay too much. The right professional advice can help you reduce risk and increase the chance of making a good return on your investment. The franchise wasn’t going as Steve had hoped. Far from it! After just two weeks he’d encountered multiple problems: the wages bill was eye-wateringly huge, the monthly recurring revenue was 20 percent lower than he’d expected, and there was a problem with the lease which meant he’d need to find and fit out a new location. Steve was in despair and wondered whether he’d end up losing the $300,000 he’d paid for the business. Here are two steps that would have helped avoid Steve’s expensive problem.
Carefully assess the business value “Is the price reasonable?” This is a question we’re often asked by franchise buyers. It’s an important question to consider because it’s all too easy to end up paying too much 30 business franchise MAGAZINE
Kate Groom is co-founder and director of Franchise Accounting and Tax. She has previously worked for franchisors and as a business adviser. Kate’s focus is on helping clients understand the financial aspects of running a business and on business planning and coaching. She is also a director of a number of ‘not for profits’. https://www.franchiseaccountingandtax.com.au/
and leaving yourself with no upside for your efforts.
• The pattern of sales revenue over the last few years.
There are several factors to consider when you’re deciding what a business is worth, including:
• What’s expected to happen to revenue and costs in the future.
• The value of the fixed assets that you’ll be acquiring, including the equipment, fitout and furniture. The assets have a value in themselves, but it will be affected by any refurbishment requirements made by the franchisor or landlord. • The cost of any refurbishments or repairs needed to bring the equipment and fitout up to scratch. • The ordinary operating profit that the business has made after paying the wages of the owner for the job they do in the business.
• The amount of time left on the lease and franchise agreements. • The up-front fees that the buyer will need to pay to the franchisor. • Whether there are good staff in place and the likelihood of being able to retain them. • The track record and experience of the franchisor. • Your ability to sell the business as part of your exit strategy. Based on this information, you and your accountant can create a financial forecast of the future profit of the business and assess the potential for making a reasonable return on
