S Buying a Franchise: Financial Matters
Structuring funding and reducing costs
structured at secured rates over a much longer time, thereby easing the pressure on cashflow.
However, funding business assets like fit-out, equipment or vehicles over a longer period than their useful economic life presents its own set of risks. For instance, if you are required by a mall or a Daniel Cloete franchisor to refurbish your store every five years, but your funding is secured over a much longer period against your home, you could easily be saddled with a lot of business debt in your personal name instead of the business funding itself.
Daniel Cloete from Westpac looks at issues that may influence your cost base and how to make sure assets are funded appropriately
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he recent jump in inflation in the US, and shortages resulting from interruptions in the normal supply chains, have made many business owners worried about the possibility of increased costs. Together with the way that Covid-19 has exposed risks in the business environment, this has made people a lot more aware of how important it is to watch their overheads and other costs. That’s always a worthwhile exercise – and as part of it, it’s important to make sure that your business assets are funded using the right products and over the appropriate time frame. Despite expected growth, economic conditions are likely to remain uneven across sectors for some time to come in New Zealand and beyond. Across the globe, it has also become evident that Governments are using the pandemic as an opportunity to change policies. So how can you structure your business funding to minimise risks from these changes?
Funding structures In recent years, historically-low interest rates have meant that it has been a lot easier to afford funding for business ventures. The focus moved from interest rates to capital repayments, which are particularly influenced by the term (time) over which the funding is done. In addition, rapidly escalating house prices in New Zealand created lots of equity that could be used to secure lending to SME businesses. That meant funding could be
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This is something that you should carefully consider when initially funding the business or when buying assets. It would also be a good idea to discuss the implications with your accountant and business banker. Using the right mix of secured and business funding, and using the appropriate equipment finance, can go a long way to saving the business money whilst balancing the risk to the owner.
Reducing the cost base After a year of Covid-related interruptions, we heard a lot of anecdotal evidence that franchise systems dealing with supply, rent and other issues, were having to adjust their whole profitability model. In an extreme example in one industry, 64 percent of the employees left the industry with no guarantee that they will come back after the borders re-open. Other companies found that the transport cost of importing supplies doubled or even tripled in some cases, on top of supply chain issues. This is bound to have a negative effect on their cost base, and on the prices of their end product. In this environment, the franchisor or franchisee purchasing group needs to step up efforts to ensure the model stays viable and profitable.
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Franchise New Zealand
Winter 2021
Year 30 Issue 02
