Money Depot and starting a franchise

A low entry cost franchise does not necessarily mean ongoing costs will be greater, as Terry Carroll found with Money Depot .

After leaving the Education Department at age 46, Carroll undertook a financial planning qualification, which helped him and business partner Steve Fuller complete the due diligence he urges all would-be franchisees to undertake.

“One of the dangers of franchises is that if the master franchisor is focused on making money out of selling the franchises then it makes sense that there’s going to be correspondingly less support in the ongoing process; if the reverse is true and if there’s more focus on getting successful profitable franchisees in place there’s going to be more support,” Carroll said.

“We are in a position now where the franchisor has offered certain stretch targets which enable us, providing we write enough volume, to pay less.

“We went into this because of the ethics, the integrity and the underlying philosophy - the values. The second reason was, being relatively new to the system, we anticipated we would learn and progress better within the organised structure and support mechanism the franchise system offered.

Be prepared to do the due diligence

“Having now reached a stage where we are more comfortable about the type of business we went into, I could say we now depend less on the franchisor. So if the split of commission wasn’t suitable to us we would have every right to move on and look for a better option, but it is a two way process. And when the franchisor recognises that, you generally reach a mutual agreement that a little bit of a large pie is better than a large bite of nothing.”

Carroll’s advice to prospective franchisees is to get expert advice, but be prepared to do the due diligence themselves prior to signing up.

“We had the capacity to do a fair amount of the due diligence ourselves. So we had some extensive discussions on it and we drew up projections and targets to meet bottom line scenarios. We did involve one solicitor to whom we paid a fairly small amount of money to look at the terms and conditions of the contract and to tell us in a legal setting if we were putting a noose around our heads,” he said.

Because it was a new franchise with no figures to show, Carroll assessed how long before the new business could support him and Fuller.

“We had to have a timeline where the business wouldn’t pay us anything and we figured we could both survive for 18 months without it paying us anything,” he said.

However, Carroll warns that before heading into a new franchise “there may be a much longer wait time before you get cash flow for your personal needs, while going into an existing franchise you will pay a lot more money but you would expect cash flow within a month or two to start paying borrowing costs”.

“We were able to fund our franchise personally. We didn’t have to go out and seek finance, but if we had it would be quite a challenge to seek finance on a business that hadn’t started. In other existing mortgage broking franchises some financiers will lend up to 50 percent of the buy-in cost, but in different franchises, such as retail bakeries, some banks will lend up to 75 percent…it depends what you are bringing to the table, what sort of hurt money you might have.

“Buying a local motel that’s not franchised, you would need to put up half and borrow half, but the lender would probably prefer you to sell your $500,000 house and use the cash rather than put it in as collateral and have to meet the payments on the full $1 million. But if you were going into a franchised motel they might allow you to put up just $400,000 and borrow $600,000 against the business.

Carroll’s advice to potential franchisees:

“You need to carefully assess the bottom line profit, carefully scrutinise worst case scenarios. This information is easy to get provided you are prepared to do the research. Whilst they are trying to protect potential purchasers of franchises, whether you are buying a hairdryer, a block of land, a car or a franchise, remember the old clause: buyer beware.

“Assess the risk and assess your financial capacity to absorb the risk. Then do a comparative study as to what sort of benefits – profit, income, increased equity – you would need to get out of the business to be clearly better off than in your current position.”

Carroll says some people approach a franchise only concerned about cash flow and not the longer term, such as whether the business can be re-sold.

He gave an example of a small country town newsagency, which might be valued at $800,000, but would a local pay that much for it, and would any potential buyer want to sell up their city home and move to the small town?

“You’ve got to be careful. Your exit strategy is just as relevant as your entry strategy,” Carroll says.

Read about buying a franchise and running a franchise.