last updated 22/06/2022
The New Normal
last updated 22/06/2022
Daniel Cloete from Westpac on finding and funding business opportunities in a changing world
As the Westpac Economic Overview reported recently, 2022 is shaping up to be ‘another challenging year’. While the economists expect a return to firm levels of economic activity over the coming year, they are forecasting significant differences across sectors and regions.
From a franchising point of view, some customers and systems are going exceedingly well, while others are really struggling. The staged opening-up of the borders and the economy will support recovery in some of these areas, but it’s not clear how fast.
Looking ahead, we need to consider the broader economic cycle and the influence of rising interest rates on disposable income.
So what does this mean for anyone looking to buy a business? Something that stood out in the latest Franchising Confidence Index was that while expectations for access to finance, availability of suitable staff and operating costs were particularly negative, one thing that was positive was the availability of suitable locations – something that may represent an opportunity.
Buyers may be able to negotiate lower prices for businesses that have had a rough couple of years, or find that site they always wanted at the right rent ratio. Landlords may be more negotiable on contribution towards fit-out, reduced rental bonds, and no rent periods during the start-up phase.
So, while it’s important to pay heed to the risks, keeping your finger on the pulse and ensuring you have the right financial advice could help you to capitalise on some golden opportunities.
Availability of funding
The good news is that, compared to historic averages, business interest rates remain very low and interest rates should not be a negative factor in getting business funding.
However, funding (especially at the lower end where personal assets tend to be involved) has become more cumbersome. This is due to several factors, including the effects of Responsible Lending requirements and the CCCFA legislation (Credit Contracts and Consumer Finance Act). These are designed to protect the average borrower, which is a good thing, but have led to a lot of additional compliance requirements. I advise engaging your bank and accountant early to make sure everything is in place in a timely manner.
Working capital - cash is king
Right now, cash is crucial to business survival – even for businesses that are making a profit. There are many examples where businesses must order stock (and pay for it) well ahead of time because of supply chain issues, while their customers are not paying them until the work is completed. This means that the business’s working capital blows out on both sides (debtors and creditors), which can lead even companies with overflowing order books into serious strife. They should involve their bank early and not try to manage it at the last minute.
After the last two years, most business owners will know their income and expenses better than ever before, which is great. Being able to forecast accurately and understand when shortfalls might arise, and how much they will be, can mean the difference between paying creditors on time or falling behind. Understanding your cash cycle can help put in place the right working capital facility to get you through those quiet periods without having to keep going to the bank for help.
Buying a franchise can improve your options
So, are the banks still lending? In general, yes – there is plenty of liquidity in the market and the banks have plenty of money to lend, provided the fundamentals of the business are sound. However, they are cautious, and more willing to lend to some industries than others. Your ability to borrow money against a business would be restricted if the industry in which it operates is struggling.
This is where buying a franchise business can actually improve your chances of getting lending approved, especially if you are buying into a recognised brand with a history of viability throughout the economic cycles. One thing is for sure – it is more important than ever to find a bank that understands you, your business, and your future plans. Choosing a bank that has a strong relationship with, and understanding of, the franchise can significantly improve the chances of getting a loan approved.
As always, getting into business can be risky but it can also be rewarding. When considering the franchise opportunities presenting themselves now, first look at the different industries represented and ask questions including:
- Is there a real need for this product or service?
- How stable is that need?
- How big is the market and is it growing?
- How much competition is there?
- How good is that competition and how long have they been in business?
- How does the current economic cycle influence this business?
- Is the franchise part of a reputable operation with a strong brand?
- Are there several franchises in the industry to choose from?
- What are the points of difference between each competitive franchise?
Once you’ve found a franchise opportunity you like, that’s the time to bring in the professionals, including a good franchise accountant, lawyer and bank. Take your time, take advice, and do more due diligence than ever.
That’s the way to find out if it really is a golden opportunity.
Daniel Cloete is the National Franchising Manager for Westpac. 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.
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