SEEING EYE TO EYE
in this article:
Professional advisors are sometimes criticised by franchisors for not really understanding franchising. In this article from our archives, here's how an accountant in Westport took a pro-active approach to helping his clients buy into a franchise and make it successful
This is the story of the couple who wanted to buy a business but didn't know how, the franchisor who had reservations about professional advisors with no experience of franchising, and the accountant who made all the difference.
When Bruce Couling was advised by his doctors that it was time to give up the strenuous life of a fisherman on the West Coast, he knew that he wouldn't easily find a shore job. If he wanted to work - and he did - he had to find something of his own. But he also knew that he lacked the business skills necessary to analyse an opportunity and decide whether or not it truly had money-making potential. Like most would-be franchisees, Bruce and his wife Vicky would be dependent on their professional advisors - their lawyer, accountant and bank manager.
It would be fair to say that franchisors do not always see eye to eye with professional advisors, and in over ten years as a franchisor Philip Horrocks has had his share of disagreements. When a franchise agreement already exists with, say, 20 franchisees, the franchisor is bound to find it frustrating when a lawyer for the prospective 21st comes back with four or five pages of changes which they wish to see made. Such changes are highly unlikely to be made because it would be unfair to have one franchisee on different terms from all the rest. Equally, if the franchisor knows his business and its cashflow and cost structures extremely well, he will also be exasperated when a well-meaning and cautious accountant ups all the costs by an unrealistic percentage and drops the projected sales in a similar fashion before telling the prospective franchisee that in this set of circumstances the franchise is unlikely to make money.
The solution to this difference of opinion lies in knowledge and communication, and in this particular tale it was accountant Peter Campbell who took the lead.
The community of Westport, on the West Coast of the South Island, is not a large one and attracts few of the larger franchises. As in most areas outside the main cities, there are no franchise specialists to call on for help. But although Peter Campbell had not had many dealings with franchises before, he had done a lot of reading on the subject and had attended seminars. 'As a result, I knew that there were both advantages and disadvantages, but that franchising could be a very successful way of getting into business,' he says.
Bruce and Vicky Couling had seen the Have A Snack! (now Provender) West Coast franchise offered for sale by the existing franchisee, and felt it was something they could do together. The business was under-performing, but they believed they could do better. They got the information from the seller, then went to see Peter Campbell.
'I'd always encourage anyone thinking of buying a business to consult their accountant early on,' says Peter. 'You need to be very careful about how you buy something because of the tax implications. You want to structure the purchase details in the most tax-effective way, not just for the business but for the buyer's own personal tax situation. If you don't get it right at the start you may not have another chance.'
The first problem which Peter found was that Have A Snack! set out a strict procedure for re-selling one of their franchises. 'I read the manual and realised the seller hadn't followed the process. I knew from my reading that most franchises have a re-sale process, and that they are usually there for a very good reason.'
Philip Horrocks explains. 'The re-sale procedure is something about which we've had a lot of grief from lawyers and accountants over the years, basically saying that if the franchisee owns the business then they should be free to sell it how and to whom they want. But franchisees are part of an overall system, and to protect the system we have to ensure that the incoming people have the appropriate skills and have realistic expectations - in other words, would we take them on in their own right if they applied for a new franchise? After all, the outgoing franchisee is walking away, but we have to work with the new franchisee to help them succeed. Frankly, the reason we put the process in place was because some new franchisees had been shafted by outgoing franchisees,' he says bluntly. 'That's not a basis for success.'
Peter Campbell felt that a prescribed re-sale procedure was a positive, but he admits that because it hadn't been followed from the start 'things did get a bit messy. I asked Have A Snack! what was needed and fortunately I knew the lawyers involved on both sides quite well, so I was able to help make things happen. I kept asking everyone "what do you want? When do you need it?" to keep the sale process moving along.'
An accountant's role usually focuses on analysing the profitability of the business, and in this area too Peter took things a bit further.
'I sat down with the balance sheets and reports from the seller to give me the financial information, but I also went through the franchise manuals to give me some indication of the quality of the franchise and what Bruce and Vicky would actually have to do. In this case there was a comprehensive manual which basically said "This is the way to do it because it works". There was clearly a strong structure and management process in place.
'Now I was able to evaluate the figures from a position of knowledge. Basically, the questions are "Is this a fair price for the business as it stands? Can it provide the level of income required? Is the level of return acceptable for the risk involved?"
'I think that when a lot of people look at a business for the first time they focus on the income they can make, but you have to consider more than that. The first is return on the labour that you put into the business. Let's say that the sort of work you are doing in the business is worth $15 an hour. You need to be able to pay yourself at least that figure.
'Secondly, you have to consider the return on your investment. If the business is going to cost $50,000, then that is $50,000 which you haven't got in the bank earning interest at, say, 6%. So you need to add that figure to the $15 an hour.
'Thirdly, you have to take into account the fact that if you put that $50,000 in the bank, the risk of your losing it is very, very small. On the other hand businesses can and do fail, so you want an appropriately higher level of return than the bank rate for the extra risk which you are taking. Generally, in small business the risk involved is quite high - perhaps up to 33%. But if it's a well-established franchise with the right image, methods and support, it reduces that risk. In this case, I felt that 20% was more appropriate.'
Having worked out the level of return which Bruce and Vicky would need to achieve in order to cover their labour, capital investment and risk, Peter was then able to tell them the bad news - the business was not currently generating sufficient return for their needs. However, this wasn't the end of the story. 'Obviously working out what you need is valuable for negotiating on price, but it also gives you a point from which to evaluate the potential of the business.
'We sat down together and looked at how the business could be grown. For example, there are three towns in the region - Westport, Greymouth and Hokitika - and the travelling distances involved in servicing all three are a factor. Westport, for example, was being serviced less frequently than desirable because the franchisee lived in Greymouth which is the centre of the three towns. That meant she always had to go in one direction or the other. However, Bruce and Vicky had each other, so Vicky was able to carry out some of the Westport servicing while Bruce travelled, and we felt that this would make a major difference. Not only could they increase the number of outlets for the range of snacks and drinks which Have A Snack! sells, but they could also get to know their customers better and be able to tailor their products to each site.'
In fact, Peter and the Coulings carried out a classic 'Strengths, Weaknesses, Opportunities, Threats' analysis and reached the conclusion that even though the business wasn't currently going terribly well it did have the potential they required - 'which turned out to be the case, very significantly,' says Peter.
Having made the decision, all that was needed now was finance. 'When they first came to see me Bruce and Vicky didn't bank with their current bank, but of course they hadn't been in business before. I had a good relationship with the regional business manager at one particular bank, and knew that he was very familiar with franchising. I asked him to find out from the specialist franchise managers of the bank about this particular franchise, and he confirmed that there were no black marks against it - that was valuable to us, being a bit separated from the franchise chat you might pick up in a bigger city.
'Then it was a question of making a presentation to the bank. We prepared cashflow budgets, the marketing plans, had the manuals, and also the valuations on their house for security. We'd worked out what Bruce and Vicky needed to borrow and how they could afford to service it. In truth they were a little short, but the bank had enough confidence to go the extra mile. I was able to help them structure the borrowings they needed in the best way, and to negotiate the rate a little. It made my fee a little more expensive,' admits Peter, 'but it helped ensure that they got off to the best possible start.'
Franchisor Philip Horrocks also has an admission to make - he was impressed. 'A lot of advisors don't necessarily know a lot about franchising and don't bother to investigate. They don't think to speak to the franchisor to find out why a certain level of costs or wastage is predicted, or why the franchisor can state that x number of clients will produce y amount of sales. As a result they make assumptions which can damage the viability of the proposed business. Of course there are plenty of occasions when a franchise proposition isn't the right one for people, but I believe that many prospective franchisees are unnecessarily put off.
'Peter stuck in my mind because he took the trouble to ask questions, listen to the answers, and then make recommendations based on knowledge. He gathered together a team of advisors - a lawyer and banker as well as himself - and made sure they were properly informed. And he took the time not just to look at the potential but to find out if Bruce and Vicky were personally suited to this kind of business.'
As for Bruce and Vicky Couling, they were delighted by the way in which their advisors worked together to help establish their new business. 'There was no way I could do it on my own.' says Bruce. 'I wouldn't have known where to start analysing balance sheets and so on. But they did all of the analysis for us, and then came back and went through everything with us, making sure we understood it all. The franchise agreement is quite long but at least we knew where we stood on everything.
'As far as I'm concerned, if you're buying a franchise it's a must to use professional advisors - and the right ones too.'
However, the successful purchase of their Have A Snack! franchise did not mean the end of the relationship between the Coulings and their professional advisors - in fact, it was only the beginning.
Peter Campbell says that as far as many accountants are concerned the focus is on paying less tax rather than making more money. 'But if you're going to have a long-term relationship with someone for maybe 15-20 years you don't just want to do audits and tax - you want to help them succeed.
'To do that, however, you need to stay in touch with their business rather than only talking to them once or twice a year - and it's difficult to build up regular contact if you have to send them a bill of varying size every time you talk to them.'
Instead, Bruce and Vicky pay a fixed amount every month for their accounting service. This covers monthly cashflow reports and GST returns as well as the annual tax return. It also covers any additional assistance the couple might need, such as re-organising bank loans as required and even negotiating with the franchisor on acceptable timing for replacing a vehicle. 'Because it's a fixed fee they know exactly what they are going to be paying, no matter how much assistance they need,' explains Peter. 'If the amount of work exceeds the budget, that's our problem, not theirs.'
This type of service is becoming increasingly popular with both accountants and their clients, not just because of the fixed nature of the costs but also because it ensures that financial information is produced in a timely fashion.
'Monthly reports enable both client and accountant to see how it's going on a very regular basis, and to spot new trends as they emerge,' explains Peter. 'It allows you to be pro-active in making changes where necessary. If you only do the accounts annually, then you get the information maybe 12-18 months after the problem or opportunity has arisen. That means you can only use them to measure what has happened, not to manage your business on an ongoing basis.
'Such regular contact also means talking to our clients a minimum of 14 times a year rather than just once, and get to know their businesses and their needs better. That helps us help them.
'With Bruce and Vicky, their focus is on selling chippies - that's where they make their money, and they are very successful at it. But running a business means you also have to handle loans and tax and GST and all the other things which don't make money, and that's the part we handle. Basically, I started them off with a proper system and showed them how to use it, and now all they have to do is code their bank statements and provide us with the information we need when we ask for it. It removes a lot of the hassle.'
Franchisor Philip Horrocks approves. 'Although we provide a lot of business systems, people have to be responsible for their own financial management because each franchisee's situation differs so much,' he says. 'Because the Coulings are getting expert advice when they need it, they have been able to focus on the business and keep tabs on their performance.
'That's certainly paid off in terms of results - after eight months, franchisee turnover in the West Coast has increased by a massive 43%, and I believe there is a lot more to come.'
Franchising is a specialist commercial area. If you have an existing relationship with an accountant and lawyer, by all means seek their advice but unless they are experienced in franchising you would be wise to consult a specialist. Look in the Directory section at the back of this magazine.
- Bear in mind that a specialist may charge more per hour but their familiarity with franchising should enable them to take less time and give better advice.
- Ask for an estimate of fees prior to engaging any advisor. Most will not operate on a fixed fee basis as there is always the potential of unforeseen questions arising; however, they should be able to give you a written estimate and an agreement to inform you if costs look likely to exceed that estimate.
- Feel free to talk to different advisors to see who you feel comfortable with, and check that they have the franchising experience which they claim. Ask for a list of clients they have worked with in this field. They are assisting you in making a life decision - choosing the right advisor is important.
- Ensure that you give your advisors all the facts and all the information provided to you so that they can help you make the right decision. If you withhold something, they cannot give the best advice.
- Insist that your advisors make contact with the franchisor to discuss any queries which they may have. A simple phone call may prevent misunderstandings and start to establish a positive relationship, as in the case of this story.
- If the franchise is a large and established one, remember that it is unlikely to make adjustments to the terms of its franchise agreement just for you. In this case, your lawyer's principal role may be to explain the meaning of each clause to you rather than to try and fight battles which will be costly and fruitless.
- If you don't agree with the advice you receive, discuss it. Remember that the advisor's role is to help you gather, understand and interpret the information. The final decision is yours.
This article first appeared in Franchise New Zealand magazine Volume 10 Issue 1, March 2001
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