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Million dollar money tips

Sarah Stowe

Peter Knight of SmartFranchise says when buying a franchise, it pays to keep a clear head when it comes to the financial aspects so as to avoid costly mistakes.

Thinking about buying a franchise can be exciting, and it is even more exciting when you are passionate about the brand – but it pays to keep a clear head when it comes to the financial aspects of your decision.

It’s fairly common for franchisees to be unfamiliar with the terms and language bandied about by accountants and franchisors so that can be a challenge.

Franchisors might provide a toolkit for working the figures, but not every franchisee will use it the same way – which means the expected figures will be different. There can be a disconnect between the numbers on the page or the screen, and making sense of them.

It pay to find a franchisor who doesn’t  overload with numbers, but provides key figures for franchisees to work with:

  • Sales compared to budget
  • Gross profit
  • Net profit
  • Bank account
  • Outgoings
  • Accounts receivable

Once you’ve made your decision, it’s important to get control by understanding the business you are operating.

Down the track when you look at the business plan which outlines how to reach the income you need you realise somehwhere along the line things have slipped;  now the income is too low,  and your financial commitments too high. When franchisees don’t see the financial commitments upcoming things will go awry.

So how can you avoid franchise failure and stay on track in your new business?

It all starts before you buy…

Here are four tips to ensure you avoid big money mistakes that can significantly impact the running and success of your franchise…

1. Check that the numbers stack up

This is one of the most important parts to get right. It is critical to check that the numbers stack up before you sign anything. If it looks like the business may not make money, there’s little chance it will improve once you’re under way.

In the excitement of honing in on a franchise to buy, many prospects can “fall in love” with the brand. They are convinced it is the right one for them. Unfortunately, the financial side may not stack up as well as they could wish. The best way to deal with this is to obtain a pre-purchase review. This is an independent review of the business by a franchise accountant, similar to commissioning a building and pest inspection before buying a house.

A pre-purchase review checks out the numbers to ensure the business can give you the return you need. It provides a clear estimate of the costs to run the business. It also shows the level of sales you need to cover these costs, including your loan repayments. It is an important part of your due diligence and provides the basis for a sound financial decision.

2. Don’t borrow more than you can afford

Most people need to borrow money to buy their franchise. If you are in this category, you need to be careful about how much you borrow.

Even though banks have tightened up their lending policies, if you offer the right level of security you can still borrow money to finance a business purchase. In some circumstances, you can borrow more than the purchase price of the business, which gives you some working capital to cover the day-to-day expenses of running the business.

The danger here is that you incur more debt than the business can repay. This puts you in a high-risk position because you will then need to repay the loan from income sources outside of the business. Extra risk arises when interest rates go up, putting you under more strain to repay your loan.

The best approach is to borrow only the amount you actually need. You should then cross check this against the profitability of the business to be sure the loan repayments can be serviced. If it seems too tight, you may need to provide a larger deposit when buying the business.

3. Set a budget

Setting a budget is a fundamental tool for every business owner. It need not be difficult. A budget sets out what you expect the business income to be and what expenses are expected. When you deduct the expenses from the sales, you will be left with the profit you can expect to receive.

The best time to set your budget is before you actually start your business, but in our experience this is rare. Some people have told us it is too hard, or they don’t know how to do it, or they have no idea what the future holds. When you think about it, however, there actually are some numbers you can predict with a fair degree of certainty.

For instance, consider your rent. By the time you are into your due diligence, you will have a good idea of what your rent expense will be. Your franchisor will be able to help you with this.

You will also be able to have a good estimate of your wages expense. Even if it is a greenfield site, your franchiser should be able to give you figures for comparative sites so you can come up with a reasonable estimate.

If you sell products, your franchisor will also be able to tell you what your cost of goods sold percentage should be. You are well within your rights to ask. The franchisor is not breaching any laws in telling you the actual results of other franchisees for this expense item.

In this same way, you will be able to come up with a pretty good estimate of your budget. This provides you with a target to aim for as you launch your business.

4. Keep track of your financial position

Now for the fun part. Once your business is up and running, the next important step is to keep a close eye on your financial position. We have yet to meet a business owner who is not interested in how they’re going.

Through cloud technology, it is now possible to do the bookkeeping and financial reporting for your business cost effectively, and you can run financial reports on a timely basis. You can look very carefully at how your business is performing.

It is important to work with your franchise accountant to make sure you’re on track. They can work with you to ensure you are complying with your legal obligations as well.

It’s a fact of life that we all make mistakes and that some of our decisions may not always be our best. But when it comes to the financial side of running your business, being forewarned is to be forearmed.

For more essential tips, insights and practical advice on financing a franchise, check out the money matters section of Inside Franchise Business (May/June edition) available at newsagencies now!