by Simon Lord
last updated 26/06/2018
The Franchise Buyers Toolbox
by Simon Lord
last updated 26/06/2018
How do you work out whether a business opportunity is right for you? Our toolbox shows you how to get all the help you need
Did you know there are over 37,000 franchised units – that’s franchised shops, restaurants, mobile businesses and more – in this country? Or that some 27.6 billion dollars is spent in New Zealand franchises every year? Franchises make up a massive part of our economy, and help many people to get into their own business.
So if you’re looking at becoming your own boss, whether you want a one-man-and-a-van operation that makes the most of your practical side, a million dollar restaurant that rewards your people skills, or a building business that allows you to put your management experience to good use, you might consider buying a franchise.
But with over 600 different franchise brands in every industry you can imagine, how do you work out what will suit you best? It’s a big job and, as with any job, you need specialist tools to get the right result. But in this case, the tools are people and information. Here’s our guide to what should be in any franchise buyer’s toolbox – and how to use those tools to ensure that you really do get the business you want.
Me, myself and I
The first thing you need to do is decide what sort of business you are looking for. You need to work out what would best suit you and what you would want from it.
For a start, you need to think about what sort of business you actually want. You’re going to be spending most of your waking hours thinking about and working in your business, especially in the first couple of years, so it needs to be something that you enjoy. That might be something related to your previous experience, or it might involve a complete change.
If it’s related to your previous experience, great – you know the industry and know you want to go on working in it. Of course, owning your own business is very different from working for someone else, and may mean learning more skills – business management, for example. A franchise is a good choice, because it will give you training, support and systems in those areas.
If you’re going for a complete change, you might want to follow a passion (eg. for food or photography) or you might be motivated by a change of lifestyle (eg. getting out from behind a desk to mow lawns).
Either way, you want to look for a business where your skills will become real strengths. Do you prefer working by yourself or leading a team? Are you a ‘hands-on’ person or a ‘hands-off’ person? Are you a night owl or an early bird? If you’re an early riser, a late night pizza business isn’t for you. If you like a lie-in, you won’t enjoy being a baker.
Of course, finding what you want to do is one thing – funding a business is another. You probably don’t keep money in your toolbox, so where will you find it?
Money money money
Franchises are available in a huge range of industries, and vary in cost accordingly from under $5000 to over $1 million. You may have savings or investments to draw upon, an inheritance, a redundancy payment or a Lotto win. In many cases, though, franchisees require some sort of additional finance. This could be funding from a family member or, in most cases, funding from a bank.
What matters is not how much you have to spend, but how much debt your new business can afford to service. Don’t try to borrow more than your business can repay – lack of capital kills a lot of businesses. Many franchises will insist on your having, say, 50 percent of the start-up costs in cash. Believe them – if they say you can’t afford their franchise, you can’t. They don’t want you to fail any more than you do.
Decide what your own goals are. If you operate them properly, most franchises should provide a fair wage for the hours you put in, a return on investment and a tax-free capital gain when you sell them. What do you realistically want to achieve in each of these areas? Can your chosen franchise deliver it?
A new business will not make money from day one – it may take several months or even longer to reach break-even. How long can you support yourself before you need to earn an income from it?
Finding a franchise is easy – there are hundreds of them in the Directory at the back of this magazine, for a start. But finding the right one for you is more difficult. Working out what suits your personality and your pocket is a good start – now you need to talk to individual franchisors to find out which particular franchise brand is going to be the best fit with your personality.
It’s important to realise that a franchisor is not just interested in selling you a business. They and their team are going to be working closely with you for a number of years, so they want someone who fits into their culture – they want to know you not only have the drive and commitment to succeed, but also the ability to work with them to build the best possible business in your own area.
Meeting franchisors is therefore a two-way process. They want to learn about you, and you want to learn about them. In many industries, you’ll have a whole range of franchise brands to choose from. Through open and honest communication with the franchisor right from the start, you give yourself the best chance of finding the one where you will feel most at home. For this reason, you shouldn’t hesitate to ask questions. Prepare for every meeting by making a list of the questions you want to ask, and write down the answers. Speak up if you don’t understand anything - the better informed you are, the more likely it is you will make the right decision.
As a starting point, look at our list of 250 Questions to Ask Your Franchisor. Go through this and mark the questions most relevant to your own situation. The six most important areas to be covered may be summarised as:
1. How long was the business running before it began to franchise, and how successful was it?
2. How strong is the franchisor’s financial position?
3. If the franchise is new (or new to New Zealand), was a pilot franchise run here and what were the results?
4. How many franchises have been opened? Have any closed or changed hands? If so, why?
5. How successful are existing franchisees?
6. Does the franchisor provide the levels of training and support you will need? How?
Once you’ve found one or two franchises where you feel comfortable, you can start to examine them in more detail.
The surest method of obtaining information about the performance of the franchise is to talk to franchisees who are already operating the business. You will get a realistic assessment from a franchisee of the return that can reasonably be expected on your investment; the hours of work you will need to put in; the amount of service and advice provided by the franchisor; the general atmosphere and image of the franchise; and the everyday experiences of a franchisee. There’s a list of suggested Questions to Ask Franchisees.
You should also make sure that you choose the franchisees to talk to. Don’t just accept a list of ‘approved’ franchisees from the franchisor – they are hardly going to point you in the direction of people who have had bad experiences. Get a full list of franchisees and choose from that. It’s fair to tell the franchisor who you want to talk to, as they may need to let your chosen franchisees know in advance that you will be calling and that you are a genuine prospective colleague, not a competitor fishing for information.
Of course, not every experience will be positive, and there’s always the risk of catching someone on a bad day, so make sure you talk to enough people to get an overall impression of the franchise’s culture and leadership.
The internet can be a powerful tool when researching any business opportunity, but you have to treat it with care. Online information is not always reliable or (in the case of international brands) relevant to New Zealand.
Generally, online information can be divided into four types.
1. Information placed by the franchisor or their agents for the purpose of selling franchises. This information should be legally accurate, but beware: it may be out of date, it may not be authorised by the franchisor or it may not apply to the area you are considering. Check all information with the franchisor before relying on it.
2. Information professionally written by third parties (eg. newspaper or magazine articles) about the franchise.
3. Statutory information (eg. company records, legal decisions) concerning the franchise and/or its principals.
4. Information written by interested parties about the franchise.
In some cases, online information can be downright malicious – here have been cases where disgruntled former franchisees have sought to damage the brand’s reputation through negative comments. Think of the way in which TripAdvisor can be used to blacken a hotel or restaurant’s reputation, and the way in which ‘fake news’ stories can spread on Facebook. If any comments you see raise legitimate concerns for you, take them up with the franchisor. There are two sides to every issue.
What online research can give you is a good feel for trends in the industry in which the franchise is operating; an appreciation of where that brand sits in the industry; and an overall feeling for the brand’s reputation in the marketplace.
Another source of valuable information about any particular franchise is your bank. That’s especially true if you contact a specialist franchise banker. Banks are often very supportive when it comes to funding franchise businesses, because they can see how similar businesses within the same franchise network have performed. A specialist is likely to have dealt with your chosen franchise before and have a great deal of experience in providing appropriate funding solutions.
These may include a mix of options and terms based on their knowledge of how the franchise typically grows or how seasonal the business is. Having the right packages in place from the start can save headaches later on, so it’s worth talking to a specialist, even if you have to go to another bank to do so.
Banks will often lend up to 50% of the cost of any new franchise providing it stacks up as a good proposition, but they will require some sort of security. This is usually property. When calculating what you can afford to borrow, remember that it is the value of the equity in the house, and not the value of the house itself, against which the bank will lend. The bank will restrict borrowings to up to 80% of the registered valuation, so if you need to borrow, say, $100,000, you will need to have a registered valuation of at least $125,000 on your property with no mortgage. If you already have a mortgage of $50,000, you will need a valuation of at least $175,000 – and so on. You may also need to check on what your house is worth at today’s prices before you start looking. It’s better to be prepared.
Being prepared also means consulting an accountant. The franchisor and the banker will be a tremendous source of help and advice, but ultimately they have to look after their own interests. That’s why you need to invest in a professional advisor to analyse the figures, minimise the risk, look after you, educate you and, eventually, to help you set up the business in the best possible way to suit your individual circumstances.
This will involve looking at lots of figures. If you are looking a buying an existing franchised outlet, there should be lots of information available on its trading history, including Profit & Loss accounts, a Balance Sheet and a Cashflow Report (see Understanding the Numbers). If you are buying a new franchise (and there are some excellent reasons to buy new), franchisors should be able to provide you with figures based either upon the performance of an existing franchise or company-owned outlet, or with figures based upon an average of stores.
Whether you are provided with a trading history or projections, get an accountant with experience of franchising to assess all figures. It’s important they should have franchising knowledge, as it is a specialist area and an inexperienced advisor may either miss or misunderstand some element. Franchise specialists will know what to look for.
Encourage your accountant to contact the franchisor direct with any queries, and to work together to prepare a budget and cash-flow analysis for the initial trading period. You will find these invaluable when talking to your banker, as the bank will want to know not only that you have the security but also that you will be able to repay the interest on borrowing.
Buying a franchise is not like buying a business where the seller walks away leaving you to do what you like instead, you are getting into a long-term relationship with another party who will have a significant impact on how your business performs – and can even take your business away if you don’t follow the rules. For this reason, you need to understand what is involved before you make your final decision.
The franchise agreement is the document on which your relationship with the franchisor is founded. Most franchise agreements are lengthy documents (40-60 pages), and are couched in legal language. You must get a lawyer to check it over and explain it to you, including such aspects as territory, term of the agreement, options on expiry, and performance criteria. Many aspects are unique to franchising, and if you don’t understand what you are getting into – what your obligations are and what the franchisor’s obligations are – then you could be in for some nasty surprises further down the track.
Use a lawyer with franchise experience – they will know what to look for and will be quicker. Lawyers inexperienced in franchising may waste their time (and your money) querying standard conditions while missing key points, such as matching up lease terms with franchise terms.
Our Directory of Franchising includes a list of franchise-experienced lawyers and accountants. Don’t be tempted to cut corners when it comes to paying for professional advice – it will almost certainly be more expensive in the long term. And don’t just rely upon the recommendation of business brokers or real estate agents, either – remember, their duty is to their client, not to you.
Finally, there’s another vital group of people you need in your toolbox if you’re to enjoy running your own business – your family. Although buying a franchise offers you the opportunity to enjoy a different lifestyle and/or increase your income, it won’t happen immediately. Depending on the business, it may take six months or two years before you start to enjoy those rewards, and during that time you’ll probably feel you’ve never worked so hard in your life. It will probably mean working long hours and weekends. You may also have to give up sporting and social commitment, at least initially.
That’s why you need to know that your family will be totally supportive of your decision and will understand your need to focus on the business as you build it up. It’s for this reason that many franchisors now interview couples together, whether both partners will be working in the business or not. They know that research shows that family support is one of the most influential factors in the success of a new business and want to be sure that everyone has realistic expectations from the start.
But if you have taken care to choose your franchise wisely, and used all the tools in the franchise buyer’s tool box to ensure your new business is based upon a firm foundation, you have the opportunity to create something that really can deliver the life you want. With a good franchise behind you, you will have the training, support and encouragement you need, the name, the marketing and the reputation to attract customers, and the operational and management systems to serve them and bring them back for more.
Going into business for yourself is a big decision, but you don’t have to do it all on your own – there’s lots of advice available to help you achieve your goals. Now, open the franchise buyer’s toolbox and get to work.
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