The Help You Need

Daniel Cloete of Westpac looks at some of the financial considerations when buying and operating a franchised business

The latest Franchise Confidence Index (see page 16) has found that, at the start of 2024, Franchisors and Service Providers are more positive about general business conditions, access to finance, sales, system growth and access to suitable staff. However, there are still concerns about the impact of current inflation on operating costs and profitability – factors which directly influence business finance. As a result, access to finance is seen as one of the biggest challenges for franchise growth. Higher interest rates also mean that funding costs have become a real expense that need to be considered when buying and operating a business.

The good news is that banks will generally be supportive for funding profitable businesses from reputable brands – an area where franchising scores highly over independent businesses. This may enable you to fund setting up a new franchised outlet, or even buying a larger enterprise than would have been possible when just using your own resources.

Going into detail

As the banks have found, franchising is a great model for someone wanting to get into a business for themselves. It differs from other types of businesses in that you can get some real, up-to-date information from several sources:

• Franchisees who are already running exactly the same business you are looking at;

• Franchisors who know the business model backwards and have lots of information about how it operates, along with facts and figures gathered from real experience;

• Specialist accountants, lawyers and bankers, who may already know the franchise system quite well and can help you through the due diligence process.

This means that after you have found an industry and a franchise which appeals to you, there are plenty of people you can approach to help you make the right decision. Asking the hard questions when looking at a franchise dramatically increases your chances of buying a profitable business. Here are some examples of questions you should be asking.

Ask other franchisees

Franchisees normally love to talk about their business, and you can learn a great deal from them, from what’s really involved in running the business to information about profitability, typical cost structures and the support provided.

• Is the franchise what they expected?

• What sort of hours do they work?

• How supportive is the franchisor?

• What do customers think of the franchise?

• Does the franchise have a Code of Practice? How is it enforced?

• Are they prepared to talk about profitability, margins, and other things?

Find out more about questions to ask franchisees at www.franchise.co.nz/articles/935

Ask the franchisor

Just as you want to make the right decision, so does the franchisor – they want to appoint the right people with the right skills to succeed, so they should be able to provide you with all the answers to these questions and more.

• What are the fees payable, both initially (the franchise fee) and ongoing (royalties, marketing fees, etc.)?

• What are you getting for these payments? eg. training, use of intellectual property, lower prices on goods and services purchased, a strong brand, coordinated marketing and advertising, etc.

• How many franchises are there? Have any failed, closed or changed hands? If so, why?

• What evidence is there that the franchisor continues to invest in the system?

• What levels of support are provided?

• What are the requirements/restrictions when the time comes to sell your franchise? Do these impact business value?

• Is there an exclusive territory? How are online sales handled?

• Is there the opportunity to own multiple units?

• Does the system measure Key Performance Indicators to help you manage your business?

• Is the franchisor a member of FANZ?

• Do they have a disclosure document?

Find out more about questions to ask franchisors at www.franchise.co.nz/articles/77

Buying an established business

If you are looking at buying an existing outlet, be aware that the increased cost of living may influence sales in certain industries. Accordingly, don’t just rely on annual financial reports – look at up-todate management reporting when doing due diligence. Oh, and check with the franchisor whether a) you would be an acceptable franchisee and b) whether there is a re-fit or re-image requirement on any change of hands.

Running the business on an ongoing basis

Once you own your own business, you still need to keep it running as efficiently as possible. After Covid, many businesses need to review their funding structures. With higher interest rates, the wrong structure could be costing the business a lot.

Examples include:

• Funding the business on an overdraft instead of a business term loan where appropriate;

• Funding assets like vehicles or equipment (depreciating assets) over the wrong term, so you are still paying for them after their useful life;

• Funding assets with overdrafts instead of equipment finance or other less expensive options.

Talk to your accountant and banker about this.

Get professional help

If this all seems challenging, get the help of a franchise specialist accountant and lawyer who already know the industry and can add value. It’s important to understand the figures yourself, so get them to explain the key numbers.

A specialist franchise bank can add value and offer lending options and transactional solutions tailored for your business.

Engage with a franchise business banker early, as you may be able to fund partly against the business/brand rather than your needing to find the equity yourself.

About the Author

Daniel Cloete is the National Franchising Manager for Westpac. For more information, contact your local Westpac Franchise and Business Banking Specialist on 0800 177 007 or email: 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.