last updated 16/09/2020
10 financial reasons to buy a franchise
last updated 16/09/2020
Thinking of buying or starting a business? Simon Lord shares ten reasons why a franchise could be your best financial option
People buy a business for all sorts of reasons: to take up a great opportunity; to be their own boss; to work with family or friends; to secure their future; because they’ve been made redundant; to move to a new area; to follow their passion; to buy a job; to create a new lifestyle.
Whatever the reason, one thing is certain: everyone wants their business to make money, not lose it – and that’s why choosing a franchise can make sense. Here are 10 good financial reasons for buying a franchise rather than an independent business.
1 - Buying Power
If you run an independent business in New Zealand, you’ll soon find that there are only a few suppliers of the products or services you need – and, as an individual customer, you don’t have much negotiating power with any of them. That applies whether you’re buying office equipment, insurance, paper cups or lawnmowers.
As part of a franchise, though, you’ll be part of a bigger group of tens or hundreds of franchisees, and you’ll have someone negotiating with the suppliers on your behalf. Buying power is not all about getting the lowest possible price: it’s also about terms, marketing assistance and many other factors. A wise franchisor mixes all these elements to get the best possible outcome for the franchisee. That should result in better prices, better service and less stress for you.
That applies to marketing, too – as an independent café, you’ll never be able to afford to advertise on television, but join Columbus Coffee and you’ll find your latest menu items on TV and all over social media. Which brings us to …
2 - Brand Value
Julie Evans was already a hugely-experienced hairdresser when she moved from the UK to live in Christchurch. Despite that, she bought a Rodney Wayne franchise – why? ‘The Rodney Wayne brand had huge longevity and respect, and I knew I couldn’t build “brand Julie Evans” to match that. It was a huge plus back then and I believe it still is,’ says Julie, who is now CEO of the franchise.
The value of a brand is not just that it puts a well-known name above your door – although that certainly doesn’t hurt. A restaurant called McDonald’s is going to attract more customers from the moment it opens than one called ‘Fred’s Burgers’, for example. More importantly, it tells people what they can expect. If someone wants their home cleaned while they are out, they will have more confidence in a franchisee from V.I.P. or Jim’s Cleaning than from someone they’ve never heard of. They know the franchisee will have been through security checks and have proper training and insurance before being allowed into their home, and know that they will have standards to maintain.
Cindy Buell of MRH, which owns the Mexicali Fresh and Burger Wisconsin franchises, puts it simply. ‘Joining a well-known brand enables you to ride the wave instead of trying to create the wave all by yourself.’
3 - Bank Finance
For most people, buying or setting up a new business requires some sort of funding – and this is another area where buying a franchise can make things easy. Finance providers know that franchised businesses often involve lower risk than independent businesses in the same industry, and banks with specialist franchise divisions have a good understanding of the various different models.
‘A good franchised business involves known financial inputs, including costs and working capital requirements, and good systems to help franchisees control costs and manage business growth,’ says Daniel Cloete, National Franchising Manager for Westpac. ‘That means we can much more easily structure appropriate finance packages for franchises than for independent businesses. Of course, franchisees need some form of security, too, but in many cases where the franchise is a well-proven model, we can also fund against the projected business income – even for a brand new location.’
Specialist franchise bankers also build up expertise in different brands. That means they know what is realistic when it comes to buying a business and may be able to make suggestions based upon your own particular situation. It’s not just about the initial funding, either – having the right funding package in place from the start can make it easier as your business grows, requires new equipment or goes through seasonal variations.
4 - Budgeting
Good businesses don’t just happen. They take hard work and, if you want to be successful long-term, they also take planning. This is where buying a franchise can really pay off, because you aren’t on your own – you have the support of a franchise team who have probably been through this before with many other people.
‘Because they have a lot of data on how their business model works, a franchisor should be able to provide you with practical assistance in all sorts of areas,’ says accountant Scott Travis of Hayes Knight. ‘These include market data, feasibility studies, budgets, cashflow forecasts and funding applications. If your franchise requires premises, they’ll also have detailed information on lease and management costs and percentages that can form an essential part of evaluating any particular location.’
Brian Mooney, who was formerly general manager with a well-known food franchise, says this is particularly valuable. ‘For example, if the franchisor knows from other locations the percentage of people entering a mall who will buy your product, then they can estimate the turnover of a new outlet pretty accurately. Some locations are never going to be profitable, so good franchisors don’t allow franchisees to go there – and you (and they) don’t lose a whole load of money working it out. It’s more risky for independents because they don’t have access to all those numbers.’
5 - Break-Even
One of the financial concepts that is particularly important to any new business owner is that of break-even – the point at which your business starts paying for itself.
The first break-even point is reached when your franchise is generating enough revenue to pay all the costs in the business, including servicing any debt, except paying yourself. The second comes when it can pay all the costs in the business plus pay you a reasonable market salary appropriate to the position that you hold within your business and the industry that you are operating in.
Knowing these figures (and being able to manage the various sales and costs that go into them) is vital. After all, it might feel good to see $10,000 sales coming over the counter every week, but if your break-even point is $12,000, you need to do something about it now – not at the end of the year when your accountant breaks the bad news to you.
The good news is that buying a franchise means you should not only be aware of your break-even points and have clear goals right from the start, but that you should reach them faster than you would in an independent business. After all, you’ll have all the benefits of the brand, buying power and efficient operating systems behind you to help you hit the ground running. Different types of businesses will have different break-even times, varying from a few weeks to six months or more, but if you know what you’re aiming for and how you are doing – and you have a franchisor helping you to understand what to do next – it reduces a lot of the stress for a new business owner.
6 - Business Systems
Reaching break-even quickly is partly achieved by putting your effort into the things that work, rather than the things that don’t work – another advantage of a franchise, where others have been there before you. As Daniel Cloete mentioned above, good business systems are a massive part of franchising. A well-established franchise will have years of experience across many different outlets, and will have developed ways of doing things and ways of managing the business that are efficient, effective and, above all, profitable. It is these systems that you are paying to learn and use when you buy the franchise.
‘Mowing lawns or cleaning houses might seem pretty straightforward, but there’s an art to making money from it,’ says Estelle Logan of V.I.P. Home Services. ‘If it takes you all Saturday morning to do your housework or mow the lawns at home, could you run a profitable business from doing just 10 properties a week? But with the right systems, you could do 5 or 6 houses or 10-15 lawns a day. We show you how to quote the job to make a profit, what products to use and how to do a professional job every time.
‘We also show you how to avoid mistakes that will cost you time, money and business growth. If you use the wrong sprays, scratch tinted windows or ringbark trees because you aren’t experienced and don’t have the right knowledge, the cost of putting damage right can be huge.’
A good franchise will also help you manage better, too, with systems and software tailored to your particular business that minimise the time you need to put in to get timely, accurate information that helps you stay on top of things.
7 - Benchmarking
One of the biggest benefits of being a franchisee, as opposed to owning an independent business, is that you are part of a group using a common brand, products, services and systems to operate your businesses. Although you might all be using the same system, you won’t all be getting the same results but, by sharing information, you can learn what the normal range is, what you’re doing well and where you have room for improvement. Even better, by learning from those doing better, you can find out how to make improvements in your own business.
In a food business, for example, you might compare not just margins on different products but the sales mix across the franchise. Who is doing the greatest volume of high price or high margin items, and how are they doing it? Who has the busiest breakfast or afternoon periods, and what are the drivers of that extra business? Can you do the same? Who has the highest staff productivity – are they motivating their staff through incentive schemes, or training them in sales skills, or paying extra to attract and retain good people? What is the average level of wastage across the franchise, and how are the top performers controlling it better?
A good franchise will have systems in place to measure all these factors and ways of sharing reliable and highly relevant information that you can benefit from.
8 - Back-up
The good news is that while benchmarking might show you where you can improve your business – and ultimately your financial – performance, you don’t have to work out how to do it all by yourself. In addition to the franchise system and specialists at the franchisor’s office, most franchises also have personnel who visit and communicate with franchisees on a regular basis to help franchisees maximise their profitability and local market share, and ensure they’re maintaining the standards of the franchise and the brand.
This support can come in a number of ways. First, there’s the sharing of benchmarking information and analysis of your data to see where improvements can be made. Secondly, there’s identifying what needs to be done – training, marketing, equipment/system upgrades or whatever is required to achieve those improvements. Thirdly, there’s overall business planning and reviews to help keep you on track towards your medium and long-term goals.
‘The role of the field manager is to show franchisees where and how to develop,’ as Scott Travis points out. ‘It’s easy for business owners to focus on working in the business rather than on it – to get stuck behind the counter serving customers rather than be out developing new ones. Although staying in touch with your customers is essential, a franchisee who spends their time doing too much of the low-paid work won’t grow their business. Part of the role of the field manager is to encourage you to get out and grow.’
And the other good news about field support is that all of this personal advice and encouragement doesn’t cost you anything extra – you’re already paying for it in your franchise fees (read more about the value of field visits).
9 - Buddy Bonding
Of course, your franchisor, your field managers and your suppliers aren’t your only source of support and guidance – a franchise also offers you a network of like-minded peers who are having exactly the same experiences as you – your fellow franchisees.
They understand what it’s like to have a staff member not turn up for a busy shift after a late night out, or face a sudden rush of work, or have to put in extra hours to be able to take the time off for your child’s prizegiving. They understand the frustrations of suppliers missing deliveries and the joys of landing a big new client. They know this because they’ve been there themselves and have already found solutions or known who to call on for help. And they’re the people that you can call upon yourself and will sit up late with at the annual franchise conference sharing stories of things that went right, that went wrong, or made them feel like a total idiot!
Don’t underestimate the financial value of this buddy network, because these are the people you will learn most from about what it takes to create, grow and manage a successful business. They are in the same franchise, with the same brand, same systems, same services, but they’re not in competition with you – they’ll want you to succeed. Above all, you won’t feel isolated, as independent business owner sometimes do. As Estelle Logan says, ‘As a franchisee you can have peace of mind that you are not in business alone – there’s always someone you can turn to for advice and help when things get tough, as they inevitably do sometimes.’
10 - Building an Asset
Finally, we come back to the point we made at the beginning: whatever their reason for buying a business, everyone wants to make money. The way that they make money from the business, however, may differ.
Buying a franchise as a way of buying yourself a job is quite common, and there’s nothing wrong with that if it gives you the lifestyle, flexibility and control you seek. However, if you’re going to be investing your money, time and career in a business, there’s an element of risk so you should look for it to pay you rather more than you could get by doing the same thing working for someone else.
‘In a lot of small businesses, there’s no difference between a working owner’s salary and the profit the business makes – they’re effectively the same thing,’ explains Scott Travis. ‘At the end of the year, the amount of profit you make is dependent on the amount of salary you’ve taken.’ Other factors, such as choosing to run a flasher car than the business really merits or overseas trips which combine business and holiday, may also impact upon apparent profitability.
That’s why, when it comes to valuing a business for sale, accountants and business brokers do something called ‘normalising the accounts’ to work out the true profitability. ‘This means working out what profit is left at the end of the year after removing all non-business expenses and a fair salary at market rates for the hours the owner actually does in the business (including director’s responsibilities),’ explains Nick Stevens of Link Business Brokers. ‘This leaves us with a figure we call EBITDA: Earnings Before Interest, Tax, Depreciation and Amortisation. The value of the business is based on this figure and, depending on the industry and perceived risk, may be a multiple of twice to five times the value, although it is typically three to four times.’
So where do franchises sit on these measures? Well, as we’ve seen, wages and salary are interlinked, making it hard to judge return on investment. The rule of thumb is that the higher the risk, the higher return you would look for – but franchises are generally regarded as low risk (which is why the banks like them, as we saw in point 3).
This tends to mean returns are often at the conservative end of the spectrum until combined with other earnings. ‘On the other hand, the lower risk and the value of a being part of a well-known branded network often means a franchise is more attractive,’ says Philip Morrison of Franchise Accountants. ‘That makes it easier to sell at a higher multiple than you might achieve for an independent business.’
In fact, if you’ve taken advantage of all the ten points above, you’ve enjoyed the advantages of buying power, branding and bank finance deals; you’ve budgeted well and passed break-even quickly, you’ve used the business systems and benchmarking to maximise your profitability, enjoyed back-up and buddies and ended up building an asset which is worth selling.
That’s why buying a franchise can make good financial sense.
To work out whether any franchise is going to be the right one for you, you'll need to do some research and ask lots of questions. There are many helpful articles on the Franchise New Zealand website - here are five of the most important:
Your Buyers Guide – Part-time, full-time, indoors, outdoors, retail or restaurant: whatever type of business you’re interested in, there’s a franchise to suit.
Find the Right Franchise – A handy step-by-step guide to choosing the franchise that best suits your own needs.
The Beginners Guide to Understanding the Numbers – Explaining what financial reports can tell you about the business you’re buying.
250 Questions to Ask the Franchisor - a comprehensive list of over 250 vital questions to ask the franchisor that will help you make the right decision.
50 Questions to Ask Franchisees - One of the best sources of information about any opportunity is the existing franchisees in the same system.
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