NUM­BER CRUNCH­ING

Inside Franchise Business - - Contents -

Why cashflow counts when buy­ing the busi­ness.

Sign­ing a lease is a sig­nif­i­cant step in the process of set­ting up in busi­ness. The num­bers are im­por­tant be­cause these financials are the foun­da­tion of your on­go­ing costs.

Spe­cial­ist re­tail val­uer and ar­bi­tra­tor Don Gil­bert, who pro­vides in­de­pen­dent ad­vice to land­lords, prospec­tive in­vestors and ten­ants, says his best ad­vice echoes the words of for­mer West­field GM Al­lan Briggs: “What are you buy­ing? You cer­tainly are not buy­ing a lovely lit­tle shop in a lovely cen­tre - you are buy­ing the cashflow, the busi­ness.”

When it comes to busi­ness, start­ing a busi­ness or buy­ing a busi­ness, it is all about num­bers, says Gil­bert.

“When peo­ple en­ter into leases, at worse they do not do their num­bers prop­erly; of­ten marry their leases and other fam­ily as­sets to their homes by way of per­sonal guar­an­tees; and have not ne­go­ti­ated the lease terms based on hard num­bers.

“To put this in per­spec­tive, the 1997 Fair Trad­ing In­quiry ad­dressed some im­por­tant points about what one signs be­fore start­ing or buy­ing a busi­ness, with good­will and cashflow be­ing thor­oughly teased out by land­lord rep­re­sen­ta­tives to the com­mit­tee.

“The con­cept of good­will was dis­cussed in the con­text of se­cu­rity of ten­ure,” Gil­bert ex­plains. The com­mit­tee chair­man asked Al­lan Briggs whether a busi­ness in a ma­jor shop­ping cen­tre had “good­will”, par­tic­u­larly at the end of its lease. His re­sponse, as re­ported by Hansard:

“The value of the good­will de­creases, de­pend­ing on the term avail­able to the mer­chant... There is no good­will at­tached to a lease, ex­cept if a mer­chant has a five-year lease, let us say, then it has some value… one year into the lease it has four years, two years in it is three years, and so on as it grad­u­ally di­min­ishes. But at the end of the lease there is no good­will.”

Your busi­ness suc­cess de­pends on ne­go­ti­at­ing lease terms that give

you a chance to write off your in­vest­ment within its time frame.

PROFIT DRIVEN

Briggs fur­ther said the value of any busi­ness is driven by the in­come earned and by the bot­tom­line profit. “Our in­dus­try is no dif­fer­ent from any other … If there is a sus­pi­cion the rentals will not be main­tained, then the val­uer is duty bound to base his val­u­a­tion on that in­stinct or knowl­edge or premise.”

It was also made clear that lease re­newal is no cer­tainty, and a busi­ness is tech­ni­cally worth­less by lease end, points out Gil­bert.

“In fran­chised busi­nesses you do not have to build a brand. Many busi­ness sys­tems are in place, such as stock or­der­ing. But this comes at a cost.

“In ev­ery busi­ness, $1 equals 100 cents. You can­not add ex­tra to a cus­tomer’s bill “be­cause my land­lord and my fran­chisor want more money” Ex­tra ex­penses come out of your pocket - your fam­ily home, if you have put that on the line.”

The time to get these things in or­der, or to quit, is be­fore sign­ing up to a lease.

The term “good­will” as used here is “su­per­profit” af­ter you have paid your­self a rea­son­able wage, says Gil­bert. “That is the money needed to fully amor­tise (write off) in­vest­ment over the term granted un­der a lease, in tak­ing on that busi­ness risk in the first place. As many leases are over-priced it is not pos­si­ble to amor­tise costs.”

You cer­tainly are not buy­ing a lovely lit­tle shop in a lovely cen­tre - you are buy­ing the

cashflow, the busi­ness.

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