While surviving the pandemic looks a surefire sign of resilience our experts suggest there are specific points to consider that can help determine whether or not the business is viable for the long term.
How do weekly sales numbers compare with pre-Covid figures?
With all the uncertainty of the last couple of years, it is little surprise that “resilience” is now high on the checklist for many prospective franchisees.
There is no substitute for reviewing and testing financial information, especially with the help of your professional advisor. However, there are a few basic questions that can be asked of existing franchisees early in the process to gain some valuable insights.
Ask them how their weekly sales numbers had held up in the last two years compared to pre-Covid levels. It is also worth asking them how the business was tracking in the couple of years before Covid. Some businesses were marginal heading into the pandemic and may have only survived due to the range of assistance programs and packages on offer. Questions around franchisor support, customer behaviour, the impact of competitors and the effectiveness of marketing campaigns may provide additional insights.
The next step would be to probe what their recent experience had been with key expenses in the business (stock purchases, wages and rent etc). Even more importantly try to get to find out what they think is causing those changes. For example, challenges in getting stock in a timely manner, difficulties recruiting or retaining staff and issues with landlords.
In isolation these answers don’t reveal much, but when consistent themes emerge the picture may become very clear very quickly.
Darryn McAuliffe, CEO, FRANdata Australia. Darryn has 30+ years in business banking, risk management and franchising. FRANdata researches, reports and rates franchise systems.
Check necessary licenses, permits and debt commitments
Franchisees should ensure their franchise lawyer reviews the franchise documents, The lawyer should highlight any red flags regarding the franchisor’s financial performance over the prior two years. It is also important to closely look at the recent history of franchisees who have left. These details do tell a story about the health or otherwise of the franchise system.
A brand new business is of course a higher risk than an existing business that has a track record. For an existing business, consider the following points:
If there is a lease review the lease terms and rent review provisions. Did the landlord provide any rent relief in the lockdown periods? When is the next market review due? There is a risk the rent may increase at that point and significantly impact on your profit.
Ensure that all the assets of the business you are acquiring are clear of debt. Your lawyer can do a PPSR (Personal Property Securities Register) search to make sure there are no security interest registered over the business assets
Check all of the necessary licenses and permits for the business and any supplier agreements are current. Check that the terms are commercial.
Buying any business carries risk but you can reduce that risk by getting specialist legal and financial advice before you commit.
Robert Toth, Special Counsel. Robert is an accredited commercial law and franchise specialist named as a leading franchise lawyer in Australia by Who’s Who Legal 2021.