What We've Learned From Covid-19

Philip Morrison

Philip Morrison of Franchise Accountants has some advice for franchise buyers and franchisees

In the past year, we’ve all had to adjust to the challenges of living and working in a Covid environment. Covid has impacted business owners disproportionately, but also unequally. Some industries have been dreadfully damaged while others have boomed; CBD locations have fared worse than suburban; and urban centres worse than provincial.

With all these changes and some sectors retrenching staff, many people have considered changing career paths and purchasing a franchise business. So what has Covid taught us? And how has it impacted evaluating buying or owning a franchise?

Change is a constant

Covid 19 impacted every business in different ways and to different extents, but ‘change’ has always been a constant. Previous generations have dealt with war, natural disasters, political upheavals, recessions and new technology from the steam engine to the internet – or, more recently, Uber and Tesla. We all have to adjust to new landscapes.

Franchise Lesson: When looking at buying a franchise, take time to understand the cycles of the industry sector it operates in. Is the sector emerging, growing, maturing or in decline? There are good opportunities out there, but you need to evaluate the sustainability of any particular franchise model. Take advice from specialist franchise advisors who are abreast of changes in sectors and how different franchise systems are performing in those sectors.

Cashflow is the life blood

Last year, the primary focus of every business owner was to evaluate whether the cashflows of the business would be sufficient for it to operate sustainably. Understanding the cashflow drivers of your business is vital.

At Franchise Accountants, we worked with hundreds of franchisees, building cashflow models, evaluating cashflow streams and advising on strategies to bridge the cashflow gap. Building financial resilience in the business for the future also became a major goal. Part of this involved focusing on rolling 3-monthly cashflow planning, rather than 12-monthly business planning. Rapid change requires a more short-term tactical focus.

Franchise Lesson: As a franchisee, you need to know the numbers that count; know your breakeven; know your cashflow cycles; and develop a menu of strategies to execute when required. Take advice from a franchise specialist accountant who knows your business and your circumstances.

Adapt and adopt

Covid constraints fuelled innovation and adoption of new business practices for many: the growth of digital solutions; contactless payments; online ordering of products or services; ‘click and collect’ and doorstep delivery are now the new normal for many businesses.

Franchise Lesson: Most franchise networks have been quick to adapt both their support structure and franchisees’ businesses to the changing landscape. In some cases, this has required reconfiguring of delivery systems, products and services; investment into new plant and equipment; or reworking of systems and processes. A lot of franchisors reported working under extreme pressure to meet impossible deadlines, but their efforts were appreciated by franchisees.

Support networks

Uncertainty is the new certain. It is a breeding ground for anxiety and fear, and financial pressure can be a catalyst for health issues, as well as sleeplessness and pressure on family relationships. People needed to develop strategies for coping, building emotional resilience as well as financial resilience. Even as accountants, we had conversations with clients around mental health issues, and these may become more common, the longer the impact of Covid lasts.

Franchise Lesson: The old definition of franchising as ‘working for yourself but not by yourself’ was never truer. Franchisees are able to access peer support, advice and guidance, as well as operational advice. This strengthened the culture within franchise systems and emphasised the value of being part of a franchise group. It’s a compelling example of the value of being part of a franchise as opposed to owning a standalone business.

Financing

Debt servicing has become topical following the disrupted trading of the last year. Some businesses have a higher proportion of debt than others. For highly-geared businesses, the issue has shifted from having security to borrow money in the first place to their ability to service the loan they already have (or now need). In some cases, rationalising and restructuring of loans has been necessary to put the business in a better position.

Franchise Lesson: Work with your franchise banker and franchise accountant to build cashflow models to establish responsible levels of debt servicing. As an existing franchisee, be open to extending debt repayment terms, or re-capitalising the business if required. Taking the right decisions now will pay off in the future.

Risk versus reward

Evaluating a franchise business always involves balancing risk (the capital and time you invest) versus the potential reward. That hasn’t changed; there are still many excellent franchise opportunities available in both new and existing locations. However, it is more important than ever to conduct more in-depth sensitivity analysis (or ‘what if?’ scenarios) to ensure robust evaluation of key elements for viability.

Franchise lesson: Franchise systems with proven business models that have weathered the Covid storm can mitigate risk. Using benchmarking can also assist with business evaluation of thecritical areas: business viability; sustainability; and profitability. We recommend commissioning a full Pre-Purchase Evaluation report from a specialist franchise accountant before committing to any business.

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Contact Philip Morrison

P 0800 555 80 20 or M 021 22 99 657

pmorrison@franchiseaccountants.co.nz

www.franchiseaccountants.co.nz