INCREASE YOUR CHANCES OF SUCCESS
in this article:
Daniel Cloete & Steve Seddon from Westpac look at how franchisees can minimise risks when buying and operating a business
The New Zealand economy has performed well in recent years and some sectors, like building and food & beverage, have shown strong growth. As a result, many people are considering diversifying away from property to reduce cash flow risks and share in that growth. One popular way to do this is by buying a franchise.
Becoming a franchisee can be very rewarding and satisfying, but it is a serious undertaking as your life savings, house and financial future are all potentially at risk. Business failures do happen, so buyers should be proactive to maximise their chances of success.
It would be rare to find a business which is always successful in all areas – even large multi-nationals make mistakes. The secret is to identify possible issues in advance and develop an action plan to limit the impact – or, better still, turn these issues into successes. Here are some tips that may help.
- Before buying the business, research the opportunity fully. A good rule of thumb suggests that intending purchasers should 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.
- Keep on top of your business. Make sure you measure the 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 spends per transaction. Staying on top of these figures helps you spot issues early.
- Ensure you have access to enough working capital. Working capital is the money used 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 and unforeseen circumstances.
- Compare 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 go and 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.
- Don’t take on too much debt. This applies equally to money borrowed 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 a risk for the business. Be careful about borrowing the maximum you are able as this will leave no room to come back if more working capital is needed. Historically low interest rates may make it easy to fund at the moment, but it may not always be the case.
- Know its worth. A business is not worth what you pay for it – it’s only worth what someone else will pay for it. To understand your franchise’s value, compare it to similar businesses both within the same system and outside. Look at your remaining lease term and refurbishment requirements, particularly if the location is critical or the business would be expensive to move. All will impact the business’s resale value.
- Look for a business that suits your personality, skill and capital resources. Before committing, spend some time speaking to your banker, accountant and other business advisors. Also spend some time with the franchisor and in the business itself.
- 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 and historically this has led to a wide range of business improvements.
- 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 the 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 fashion-related 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 pro-active.
Finally, once you are settled in the business make sure you are able to take some time away regularly. Although you may work for more than 50 hours per week at the beginning, business owners need to take a break to avoid burnout or other personal issues.
Family support is essential to the success of any business. Before committing to a business ensure relevant family members understand both the risks and potential rewards. If they are not involved on a day-to-day basis, keep them fully-informed at all times.
In summary, do your research before you purchase; don’t rush your decision; take advice; and tackle any issues early. Monitor your business and outcomes and don’t be in too much of a hurry to spend the profits. 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 management and good advice.
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.
This advertorial is taken from Franchise New Zealand magazine Year 25 Issue 4
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This material is copyright © Franchise NZ Marketing Limited, Franchise New Zealand ™ magazine and Franchise New Zealand On Line . While it may be downloaded for personal use, no part may be reproduced in any form whatsoever without the specific written permission of the publisher.