by Franchise Accountants
last updated 08/12/2019
Who Ate All The Profits?
by Franchise Accountants
last updated 08/12/2019
Philip Morrison of Franchise Accountants on making a food business a financial success
If you have never run a food business before, a franchise can be very attractive. Having someone set up your business for you, train you in every aspect of running it, give you the systems you need to manage it profitably, and the support to keep you on track as you grow can be worth many times the fees you pay.
But no matter how well-known the brand and how good the support you receive, it’s still possible to get it wrong in the hospitality sector. Here are some tips from a financial viewpoint to help you get the best out of a franchise and maximise your profits.
Location, location, location
Food businesses rely on foot or road traffic to attract customers (or well-populated territories if they are mobile). So consider site selection carefully – just because there’s a cluster of other food outlets around doesn’t automatically mean the location is good, or that there is enough business for all. Ask the franchisor for more information around site selection methods and what attributes they use in assessing the suitability of a site. Depending on the brand, fit-out costs can vary from $200,000 to $750,000 so the location needs to work well to support that level of investment.
The right site at the right price
Rents can vary greatly and leases can be a minefield, so get your lawyer and accountant to review them before signing. Nothing eats up profits faster than bad leases, high rents or extortionate rent reviews. The franchisor should know what is a reasonable rental as a percentage of turnover, so look to stay within this figure. Using franchise-specialist advisors will help, as they will have a better picture of the whole sector.
Don’t borrow too much
If you borrow more than the business can comfortably afford to repay, servicing the debt will eat up the profits you should be making. How you structure the loan can affect the interest rates you have to pay. If your accountant tells you not to borrow more than you can afford, listen to them – you’re better to buy a smaller business that you can afford now rather than risk losing the lot by aiming too high, too soon.
Watch the benchmarks
Good franchise networks provide information on areas where profits can be eaten so that franchisees and their advisors can see where there might be a problem. Areas that are commonly benchmarked include Gross Profit percentages, wages as a percentage of turnover, productivity, sales by day-part, and wastage, to name but a few. It’s a massive advantage of franchising that identical businesses can share and compare information for the good of all. Watch the benchmarks and your profitability will improve.
Look after people
Restaurants often operate 7 days a week and at least 12 hours a day, which takes a lot of people. Being on top of staff rostering and payroll is important to avoid labour costs running away with you. The increase in the minimum wage is putting margins under pressure in many hospitality businesses.
At the same time, low wages mean staff can move for another 50 cents an hour. Hiring is expensive and disruptive, so providing a good work culture, showing appreciation and having a bit of fun sometimes are essential ingredients.
Watch the cash
Cash is king in operating and surviving in business, and food businesses tend to be cashflow positive – that is, you are usually paid by the customer before you have to pay for the food and wage costs you incurred to deliver the product.
Where there’s a strong cash element, though, you can be at risk from staff theft. This is an area where good processes help and benchmarking can soon identify issues. Potentially a bigger problem is where a franchisee is tempted to under-declare a proportion of their takings either to the franchisor or the IRD. This is massively risky – the former could see them lose the business, while the latter could see them receive a massive fine or even end up in jail. It’s also worth noting that under-declaring income means that when they come to sell, the business will be worth less than it should be. Don’t take the risk.
Be prepared to reinvest
Almost as bad as borrowing too much is failing to reinvest when you need to. If your outlet looks shabby and tired, you won’t attract new customers and your existing ones will move to that new place down the road. This applies both to new franchisees buying an existing outlet and long-established franchisees who are too used to their surroundings to see problems.
Keep an eye on the competition
Know your market, know your customers and know what’s going on. If you’re charging premium prices, you need customers prepared to pay them for a premium product. If you’re competing on price, watch your margins and fixed costs. As your accountant can demonstrate, small changes can have big impacts.
Operating a food business isn’t just a matter of providing good food and a welcoming smile – you need to be able to manage a lot of different factors in a competitive market. But if you buy a good franchise, a lot of the guesswork will be taken out of it for you.
To put it briefly:
- Choose a franchise that suits your pocket and your abilities
- Invest in franchise-experienced advisors to help you find the right business and the right location
- Follow the system
- Use the benchmarking information to drive constant improvement; and
- Watch the cashflow
Get these elements right and you’ll have a profitable business.
See this advertorial on page 94 of Franchise New Zealand magazine Year 28 Issue 3
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