Increase your chances of success

Daniel Cloete of Westpac looks at some ways that franchise buyers and franchisees can minimise risks

After several rough years, economically speaking, New Zealanders are looking at possibilities again. Some may be following a dream or looking to move to a new area, while others are looking for opportunities for self-employment. Many people are considering diversifying away from property to reduce cash flow risks, or looking to build income and equity. Buying a franchise can help you achieve all of these things, but you do need to be careful as your life savings, house and financial future are all potentially at risk. The secret is to identify possible issues in advance and develop an action plan to reduce possible problems or turn them into successes. Here are some tips that may help.

Be prepared

• Before buying the business, research the opportunity fully. A good rule of thumb is to spend at least one hour of investigation for each $1000 invested. This includes researching the business, its location, competition, and the industry; speaking to other franchisees; and consulting franchise-experienced accountants, lawyers and the local council. In this way, you can learn from the experience and mistakes of others.

• How will you keep on top of your business? Good franchise information systems will help you measure key aspects of your business, including sales numbers, gross profit margin, controllable costs (labour costs, wastage etc.), taxes and profit. Other aspects may include tracking customer numbers and average customer spend per transaction. Staying on top of these figures helps you spot issues early.

• Ensure you have access to enough working capital – the money you will need to run the business, pay the staff, pay the rent, etc. You also need to ensure you hold enough working capital to cover any start-up losses/costs before the business starts to make money, and a little in reserve for unforeseen circumstances.

Stay on top

• Compare your financial projections to actual results at least monthly. Look at any variances (negative and positive) and develop a specific and measurable action plan to handle them. For example, if your labour costs are higher than expected, then go back to your rosters and reduce this cost. Make the hard decisions early before your business is put at risk.

• Keep your bank informed. Meet with your bank regularly, particularly if you have a problem. They want you to succeed, so the earlier you seek advice, the better.

• Limit the money you draw from the business. Don’t buy a new car or upgrade your house before you are certain the business can afford it. Businesses need money to fund expansion; spending it on other things will cause cash flow problems later.

• Don’t confuse profit and cash flow. Even profitable businesses have gone bankrupt due to an inability to manage their cash flow. Creditors, including the IRD, are able to apply to liquidate a business if they are not paid within their terms. IRD arrears has been an issue for some businesses post-Covid.

Is it worth the money?

• Don’t take on too much debt, whether from banks, equipment leasing companies, family members or vendor finance from the seller of the business. All borrowed money needs to be paid back with interest and this creates risk. If you would have to borrow more than the business can afford to repay, look for a different business.

• Don’t borrow the maximum you are able to from the outset, as this will leave no room to come back if more working capital is needed. Recent low interest rates made it easy to fund many business purchases, but increases over the last year mean that if owners didn’t have some reserves, they could face problems.

• Understand that a business is not worth what you pay for it – it’s worth what someone else will pay for it. To understand a franchise’s value, compare it to similar businesses both within the same system and outside. If it’s an existing business, look at the remaining lease term and refurbishment requirements, particularly if the location is critical or the business would be expensive to move. Does the rent ratio still make sense with the business model? All this will impact the business’s resale value.

Operational success

• Look for a business that suits your personality, skill, and capital resources.

• Follow the franchisor’s system. Buying a franchise means you agree to follow the franchisor’s proven business methods. If you have a suggestion for improvement, discuss it with the franchisor. All good franchise systems encourage franchisee input.

• Plan for expansion. If you are looking to open a second outlet, ensure you have a comprehensive and robust business plan. How are you going to manage both the new and existing businesses? Will you need to employ more staff to cover your absence? How will you ensure the original business maintains performance while you work on the new one?

• Ensure stock levels are optimum. Overstocking or carrying obsolete stock will impact the business and its cash flow. Controls need to be set and monitored, especially in seasonal or fashionrelated industries.

• Maintain quality control and customer service. Make your employees accountable for their actions and reward those who exceed expectations. Be highly selective about who you employ. Invest in training and other support.

• Watch local competition. Your franchisor will see the national picture, but local threats may be independent businesses, new entrants, or other franchise groups. Don’t wait for your sales to fall before acting. Be proactive.

Achieving personal success

Finally, once you are settled in the business, make sure you take some time away regularly in the interest of your health and wellbeing. Although you may work for more than 50 hours per week at the beginning, business owners need to take breaks to avoid burnout or other personal issues.

Family support is essential to the success of any business. Before committing, ensure family members understand both the risks and potential rewards, and keep them fully informed at all times.

Operating a well-run and profitable business can be one of the most rewarding things you will do, but it will only come as the result of good choice, good management and good advice.

About the Author

Daniel Cloete is the National Franchising Manager for Westpac.

For more information, contact your local Westpac Franchise and Business Banking Specialist

P 0800 177 007

E franchising@westpac.co.nz

The information contained in this article is intended as a guide only and is not intended as an exhaustive list of matters to be considered. Persons entering into franchise agreements should seek their own professional legal, accounting and other advice.