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SIX STEPS TO SUCCESS WHEN BUYING A FRANCHISE

by Glenice Riley,
last updated 20/09/2017

Franchise buyers are faced with more choice than ever these days, so how do you choose one that will work for you? Glenice Riley helps you narrow down the options

Six Steps to SuccessNew Zealand is the most franchised country in the world. As the latest Survey of Franchising shows, there are 631 different franchise brands here, and more are being created or imported every week. That means the potential business buyer is faced with a huge range to choose from. In addition, some 10 percent of the existing 37,000 franchise outlets may be for sale at any time, adding established businesses to the mix and making your decision even harder.

But the truth is that of all these potential businesses, only a few will actually be right for you. Think of it like buying a car. When you start considering the car you are going to buy, there are various things you need to take into account: your budget; what sort of motoring you do; how many people you carry; reliability; safety; running costs, and so on. By the time you have listed all these factors, you will have reduced the possibilities from thousands to a realistic few models. You can do the same when you buy a franchise, only you will want to do it even more carefully. After all, a business is not only more expensive than a car – it is also going to take up your time and effort, and possibly represent a major change in your life’s direction.

So let’s say that you have decided the time has come to buy a business of your own, or to move on from the business which you already have. You want a franchise but you’re not sure what to choose. The following six steps are designed to help you narrow down the opportunities from the hundreds available to the five or six which may be right for you. The trick is to be methodical – and honest.

Step One – Price

Buy only what you can afford in today’s dollars

Franchises, like cars, come in all shapes and sizes, and certainly in all sorts of prices. You can invest $20,000 in a business, or $1 million – it’s up to you. That is, assuming that you have the money (see What can you afford? at www.franchise.co.nz/article/2397).

If you take a ‘blue sky’ approach to choosing a franchise, it can be very easy to get carried away. What happens if opportunity ‘A’ sounds just right for you and offers exactly the kind of work you have always wanted to do, but requires just a little bit more than you have to invest? It’s very tempting to persuade yourself that you can manage if you borrow a bit more, scrape by for a bit at first, and then make the additional payments from the growing profits which will undoubtedly follow.

Wrong! You will already have quite enough challenges in front of you when you start a new franchise business: new responsibilities, new premises, new staff, new customers, perhaps a whole new industry. The last thing you will need is to give yourself constantly nagging worries about your finances. So buy only what you can afford in today’s dollars. I know this may sound harsh and yes, there are always examples of people who have managed to achieve success on a shoestring, but remember this – not having enough capital to support your business as it grows is the biggest single reason why new businesses fail. If your franchisor or your bank know that you are going to be taking on more debt than you can realistically handle, they will quite rightly prevent you from proceeding. They don’t want a failure on their hands any more than you do. So be honest with yourself and with them.

Is there any way round this? Well yes, if you have patience and determination. If you really want the $150,000 franchise but can only afford the $50,000 one, then swallow your desires for now. Buy the smaller business, work hard, build it up over a couple of years then sell it and move on to the larger one. This is an increasingly common approach for people getting into their own business. In fact, I know of one person who started with a $7,000 franchise several years ago who used the cashflow from the first franchise to fund a second and so on. He eventually owned four franchises with a combined turnover above $2 million. It is possible – but you have to be disciplined about it and start off with something you can afford.

On the other hand, if you have the funds to support larger scale business then there are other options. The franchise sector has evolved. As well as attracting traditional single-unit franchisees, it is increasingly appealing to ‘super franchisees’ who own a number of outlets within one franchise or even in different franchises. Some franchises also offer Area Development Agreements which give you an umbrella contract with the right to open an agreed number of franchises in a geographic area in a set time frame. You then oversee management of a chain of franchise units operated by employed managers. Think outside the square.

Financially, you also need to look at what return you must get from your new business in order to meet your other commitments. If you are used to a $70,000 salary, say, you might find it difficult to manage if you buy a business which is projected to earn you less than this. Of course, if you are using the franchise as a starter vehicle designed to give you a rapid capital gain so you can ...

This article appears in full in the latest issue of Franchise New Zealand magazine (Year 26 Issue 3). Read the entire article in the digital magazine or, if you live in New Zealand please send for your free print copy.

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