last updated 22/07/2019
The Circle Of Life
last updated 22/07/2019
Having the right banking solutions in place for every stage of your business life cycle can make a big difference, says Daniel Cloete of Westpac
All businesses have life cycles, generally moving through four stages:
In the case of a franchise, in addition to the life cycle of each individual franchised outlet you have to consider the life cycle of the franchise system as a whole and the positioning of the franchised brand in the market.
If you’re looking at going into a new business, you also need to consider the impact of industry trends which can work for or against the business. In the last 10 years we’ve seen retail sales in the music, video rental and book industries being negatively influenced by on-line offerings, while the hardware and café & restaurant sectors have shown healthy sales growth recently.
Knowing where your own business is in each of these life cycles can be helpful in making all sorts of decisions, including determining the best banking solution for you at any particular stage. Let’s look at each in turn.
Life at this stage is a likely to be a challenge, but the thrill of starting a new business – and the support of your franchisor and your specialist advisors – can help you overcome things. From a banking point of view, you’ll have some initial funding need. If you buy an existing business, or start a new business with a stable franchise system which is accredited for franchise funding, this will be easier.
At this time there’s a strong focus on customer service, overheads are low and prices and product features very competitive. Banking and finance needs are likely to be fairly simple: a basic transaction account, a small overdraft to smooth cash flow (most retail franchise businesses go cash-flow positive quite quickly), a business credit card and, where appropriate, merchant facilities.
If you’re dealing with a bank offering a banking package for a specific franchise system, a lot of what you need will have been determined already – and attractively priced to recognise the strength of the particular franchise system.
In order to grow, you need to expand your sales or production capacity. You may want to add more equipment, do a refit to make the business larger or even open more outlets to better serve the customer base.
Franchisees may want to grow by buying or setting up more franchises from the same or complementary franchise brands. In many cases, they can do this by using the equity they have built up in their existing business to help fund them into the additional businesses.
For a franchisor, growth may mean the need to develop new products, introduce new technology, or grow the number of outlets. They may also consider acquiring or merging with a competitor to take advantage of the benefits of scale.
This is a crucial time, with the business poised between continuing growth or stagnation and ultimately failure. Staff numbers are growing, but not as fast as the workload. Cash flow is tight, and overspending could bankrupt the company, yet you need to invest in bigger plant, premises or production capacity. You need specialist help with payroll, collections and processing transactions as well as insurance, tax and finance. You could also find your bank is playing a more pivotal role – more financial partner than service provider.
It’s also likely that personal assets are being invested into the business. This is a good reason to start saving and develop a wealth creation plan. The discipline of personal investing is needed to ensure not all your eggs are left in one basket.
Maturity happens when your company has reached its peak and the sales curve has started to flatten off. Maturity is a comfortable place to be – the company has survived the drama of the growth phase and found its place in the market. Sales are increasing incrementally or at market growth rates; production is near capacity and staffing levels have settled. We see this in the networks and individual sites of some well-known franchise systems that have been in the market for a decade or more.
This doesn’t mean that operations are easy at this stage. Growing market share is tough, and competition is often ruthless and increasing. You may need to restructure your business to meet these new challenges, and the franchisor may need to broaden the range of products to stay competitive. Profit growth will come from cost control and greater efficiency. Capital reserves may start to grow, but this is a tough environment and marketing strategies should switch from acquisition to retention.
In this stage your banking and financial needs are much more complex, with a need to keep cash reserves working hard as you tailor your financing and debt solutions. The funding cycle should be timed to allow investment at the right time. Some refurbishment and re-image spending may be required to stay at the top of your game and protect the value of the business.
A strong and stable company reflects prudent and measured development. On a personal level, you should be reassessing your wealth creation plan now you’re harvesting the fruits of your labour.
With goals achieved and a thriving business established, it’s time to hand over the reins to a new franchisee, a family successor or a number of shareholders, or to merge into another company. From a funding perspective, you should be in a position to exit.
Giving up your business may be hard to do, and that’s why planning for retirement needs to take into account lifestyle changes as well as the financial goals. Banking is suddenly much more personal.
With a change of ownership, new energy and an injection of fresh ideas and fresh capital, many franchisors and franchisees may begin the life cycle all over again. Life cycles keep on turning; the more you understand them, the more prepared you’ll be for each new challenge as it arises.
That’s why it’s important to have the right banking – and the right bank – in place for every step of the journey.
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 3
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