ASK THE RIGHT QUESTIONS
in this article:
Educating yourself about franchising and franchise opportunities increases your chances of success, says Westpac’s Daniel Cloete
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Daniel Cloete: 'Educating yourself at the beginning will give you the best possible chance of success in your new business'
The New Zealand economy has been performing well over the last few years, and the resulting increased confidence has led more people to look at buying their own business. Franchising is particularly attractive for the first-time buyer (see page 6) and the number of overseas franchises entering the New Zealand market and local companies franchising their concept has also increased. The result is a wealth of opportunities for the business buyer to choose from.
For potential franchisees, though, making a wise decision requires them to consider many different issues: what industry attracts them, what location best suits them, which franchise most appeals and what investment level does it require?
The secret to making the right choice is to become an educated franchise buyer, asking the right questions of the right people at each stage. There’s also a lot of background information freely available: in this magazine and the website at www.franchise.co.nz; from banks; from the Franchise Association of New Zealand; and from specialist professionals such as franchise accountants and lawyers. Unfortunately, potential franchisees don’t always take the time to acquire this information, or to act on it, and that can lead to problems later on.
As a brief introduction, then, here are the main points to look out for when you start researching any franchise opportunity.
Before considering any particular franchise system, you need to learn about the viability and trends in the industry you are looking at. For instance, the New Zealand population is ageing and has less time because of career pressures, which means franchises delivering services in that space are growing. Young people especially are demanding healthier choices in fast food and more variety in choices of food and casual dining options. New migrants are creating new markets and at the same time introducing new products and concepts into New Zealand. But what’s a fashion and what’s a sustainable business?
- Is there a real need for this product/service?
- How stable is that need?
- Is the product/service still growing as a category?
- How will changing technology affect it?
- How large are the current and potential markets?
- How much competition is there in the category already?
- How long have those companies been established?
- Are there several franchises to choose from?
- What do they have in common?
- How do they differ? Is that important?
Having identified your chosen industry, you then need to find out about the franchise systems in that sector. The franchisors’ own websites will give you some of that information, but finding out any detail will require you to contact the franchisor directly. They may then send you an information pack, but you will also want to ask questions about such issues as:
- Length of franchise term;
- Initial and ongoing fees;
- Total investment required;
- What you get for your money;
- Evidence of franchise support, training and reinvestment;
- Multi-unit opportunities.
There is an exhaustive list of 250 Questions to Ask at www.franchise.co.nz/article/77 that will give you more details.
When looking to buy any business, the first thing to find out is how much money you require. This is not always straightforward: franchise adverts can be very confusing because franchisors do not all use the same assumptions.
If the capital requirement is listed as between $150,000 and $200,000, what is included in this price? Does it include the franchise fee and, in the case of a new outlet, the fit-out? Does it include equipment, legal cost and accounting fees? Is the amount the total cost of your investment, or does it only reflect the cash equity required (which could be half of the full set-up costs)?
The next important question if you want your business to be profitable is not, ‘How much can I borrow?’ but rather, ‘How much can the business afford to repay while still delivering me a decent wage and return on investment?’ To know this, you’ll need to see indicative figures from the franchisor and discuss them with your accountant (and, by the way, you must use an accountant – preferably one with franchise experience) if you want to make good decisions.
You’ll also need to know how much working capital will be required. This simply means the amount of cash you need to operate the business effectively. It is used to pay the bills; for example, wages and phones, and sometimes to carry stock until the business generates some income. Very few businesses can operate without working capital.
Another important question is: ‘Does your bank have the franchising experience, lending and transactional banking packages, benchmarking data and the strategic relationship with your chosen franchise system to deliver real added-value lending?’ If your chosen franchise is a well-established one, using the right bank could enable you to fund against future cash flow, thereby lowering your equity requirement and enabling you to afford a much larger business than would otherwise be the case.
A specialist franchise banker can also assist you beyond the initial lending stage – for example, with franchise-specific transactional and personal banking packages. A lot of people tend to concentrate on the initial lending but forget about ongoing transactional banking needs that will directly influence their bottom line. It’s worth noting that if there’s a special package available for your chosen brand, it means that every time the franchisor negotiates more benefits for the systems based on the volume that franchisees are doing, you will automatically qualify as well.
These are only a few of the initial questions. Your specialist franchise banker and accountant will be able to assist you with all the factors involved, including offering different funding options, transactional solutions and suggesting optimum funding structures for your specific business.
Franchisees often love to talk about their business and you can learn a great deal from them about the realities of running the business, profitability, typical cost structures and the support provided by the franchisor (www.franchise.co.nz/article/935). You should also consider completing the online Franchisee Pre-entry Education Programme from Massey University and the Franchise Association of New Zealand. This free programme includes modules on Franchising Basics, The Money Side, The System & Start-up, Operating & Support and doing Due Diligence – find it at https://tinyurl.com/fanzed.
The final person to ask questions of is a specialist franchise lawyer, who will explain your rights and commitments under the franchise agreement and check the details, including such things as the terms and conditions of the lease if premises are involved. You’d be horrified if you purchased a business only to find that the lease expires in six months or the rent is increasing so dramatically that the business is no longer profitable – sadly, though, it can happen if you’re not careful.
This may all seem a lot of work, but educating yourself at the beginning will give you the best possible chance of success in your new business. Get all the answers to all your questions and if you don’t understand, need more detail or don’t believe the enquiry has been answered properly, say so. Above all, don’t feel guilty for asking lots of questions. Your money, your livelihood and your future are at stake.
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.
See this advertorial on page 22 of Franchise New Zealand magazine Year 26 Issue 2
Contact details for Westpac
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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.