Investing wisely in a franchise will ensure you have the best chance of success and get a good return on your financial outlay. 

If you have a nest egg, redundancy or a superannuation payout, it is easy to take shortcuts to get where you want to be – a business owner.

But it is crucial to think about the investment as carefully as you would if you were relying on a bank loan. In fact, it’s a good idea to think like a bank if you’re investing your own money in a franchise.

Here’s how it works with the banks. Let’s say you took out a business loan to purchase a franchise. The bank would expect the loan to be repaid within the franchise term and would charge interest. 

Repaying your capital

Of course, you will hope to make an income while you operate the franchise but this is very different from the repayment of your capital and return on that investment.

Income is what you get in exchange for the role you play in the business, for instance as store manager, sales person or technician. But as an investor, you also want to have an indication that your investment can be repaid and that you will get some sort of financial reward for placing this capital at risk.

This is where it pays to get advice from a franchise accountant. Someone with the right experience can help you adapt your due diligence calculations to take into account this capital repayment, and help you think through the risks and how to mitigate them. 

Is the risk reasonable?

With no bank to answer to and a deep desire to get into business, it’s all too easy to gloss over the detail of what the business is actually worth. This is especially true if you have more money than the business is going to cost. 

If a business is profitable and you pay a premium for it you need to be sure you can regain your investment.

The reality is that some franchises are simply overpriced. The upfront franchise fee is not justified by the training and the brand value, or the fitout costs are so high that they can’t be recovered over the life of the location or vehicle. 

This is why it’s important to understand what you are getting for your money. You will want to consider:

• How reliable is the revenue stream?
• Do you think you’ll be able to increase the income of the business? Might it instead decline?
• Can you find evidence that the up-front franchise fee is reasonable? Consider whether there’s a track record of franchisees getting off the ground quickly and making a good income or is the franchise new and unproven? 
• What equipment and fitout do you get for your money? How does that compare with what you could purchase in the open market?

A franchise is a long term investment, often five years, and so take your time. Think carefully. Seek advice from independent professionals who understand the franchise sector and can help you assess the opportunity.

This article is part of a feature in the Feb/Apr edition of Inside Franchise Business magazine. You can subscribe to the print edition.

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