last updated 15/09/2022
How To Find A Good Opportunity
last updated 15/09/2022
Daniel Cloete from Westpac offers some important questions for business buyers
Despite headwinds like inflation, interest rate rises, supply problems and a general shortage of staff, economists are still seeing strong growth for the New Zealand economy through 2023. Although you can argue that the shortage of staff and some other factors may be linked to the bounce-back effect after lockdowns, the overall picture suggests that there are still good new business opportunities for the wise buyer.
In my last article, I looked at the continuing availability of funding, the need to manage working capital, and why buying a franchise can improve the options for business buyers. I also suggested some questions that buyers might like to ask about the industry that they were looking at.
So what do you do next? After exploring different industries and trends, and considering the franchise opportunities within your preferred sector, you need to get into the details.
This is an area where franchising is a great model for someone wanting to get into a business for themselves. If you are starting your own independent business, all you have to go on is your own research and your feel for the market; if you are buying an existing business, you are dependent on figures supplied by the vendor and your belief that you can do at least as well as the previous owner. But when you buy a franchise, you can get some real, up-to-date information from several sources. These include:
- Speaking directly to the franchisor team – not just the franchise salesperson but, as you get serious, some of the specialists in areas such as marketing and property;
- Talking to other franchisees in the group;
- Talking to other franchises in the same industry;
- Consulting specialist accountants, lawyers and bankers who know the franchise and its competitors in the industry, and who can help you through the due diligence process.
Don’t be hesitant – asking the hard questions when looking at a franchise dramatically increases your chances of buying a profitable business that is also right for you.
So what should you ask franchisees?
Franchisees normally love to talk about their businesses, and you can learn a great deal from them about what it’s actually like running the business, typical cost structures and the support provided. They may also be prepared to talk about profitability, margins, and other things that are normally confidential, especially if the franchisor has confirmed to them that you are seriously considering joining the franchise. Questions might include:
- Is the franchise what they expected?
- What sort of hours do they work?
- How supportive is the franchisor?
- What do customers think of the franchise?
- Does the franchise have a Code of Practice? How is it enforced?
Questions to ask the franchisor
Remember, although franchisors are selling their opportunity, they also want to make sure that new franchisees are a good match and will be able to run a successful business. That means that they should be able to provide you with all the relevant information you need, and answer all your questions. A few examples are:
- What are the fees payable initially (the franchise fee) and ongoing (royalties, marketing fees, etc)?
- What do you get for these payments? For example, training, use of intellectual property and systems, lower prices, a strong brand, coordinated marketing and advertising, etc.
- What evidence is there that the franchisor continues to invest in the system? What levels of support are provided?
- Do franchisees get an exclusive territory? How does the franchise manage on-line sales?
- Does the franchise measure and share Key Performance Indicators to help you manage your business?
- When buying an existing franchise, is there a requirement to refresh or re-image the outlet? If so, what is the likely cost?
- Can franchisees expand and own multiple units?
- What are the restrictions when re-selling my franchise business? (approved buyer, franchisor support, renewal fees, etc). What impact does this have on the value of the business?
Take professional advice
If this all seems challenging, it should – after all, you are making a big decision. That’s why it’s worth getting the help of a specialist accountant and a lawyer who already know about franchising and can help minimise your risk and maximise your profit. They will not only help you analyse the opportunity, but will explain the figures and your obligations as a franchisee. Understanding these is important to your future success.
Also, engage with a franchise business banker early on in your search. A specialist franchise bank can add value and offer lending options and transactional solutions tailored for your business. If the bank knows the franchise system, you may be able to fund partly against the business/brand, and they will also be able to give you valuable transactional banking advice.
Being informed and taking good advice will all help you make the best possible decision when the time comes.
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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