BUYER BEWARE
Before committing yourself to buying a franchise, be sure to do your due diligence and remember that seeking professional advice is an investment.
Buying a franchise is a major decision. It is right up there with buying a house and even deciding to marry. It is a long-term commitment that will greatly impact you, your lifestyle and your family.
It is a little like leasing a rental property. You will be given the right to run the business for a certain term, but once the agreement ends you lose the right to run the business any more. Think of it like leasing or renting the business for five or 10 years, or whatever the term of the franchise agreement.
This has implications for the returns you need in the time frame of the franchise agreement. Determining if the franchise will give you the returns you need is not easy, and you will need solid advice as well as doing your own homework.
Research by the Franchise Centre at Griffith University (now FranchiseED) on due diligence found that more than a third of current and former franchisees had regrets about the amount and depth of their due diligence. The areas they believe they should have researched more thoroughly included financing, the price paid for the business, cashflow forecasting, checking inventories and understanding leases.
There is a saying that when it comes to property, you make your money when you buy rather than when you sell. This means that if you buy at a good rate (low price), you have more to gain when you decide to sell, and this increases your wealth.
AVOID PAYING TOO MUCH
This can be the same in franchising. The first thing you need to do is avoid paying too much, or in other words, buying a franchise that will not give you the returns you need. To break this down, your franchise needs to provide enough revenue to pay its daily running expenses, pay you as the owner of the business a reasonable return, plus pay off the loans you have taken to buy the business.
Because most franchise agreements are for five years, usually with the option to extend for another five years, it is wise to pay off your loans in the first five years. Then from years six to 10 you have more opportunity to build your nest egg as you do not have the loan to pay off and you can save or invest this money.
We have all seen the impacts of paying too much for a business and not being able to make a reasonable living. You do not want to be in this position. These are important considerations, and you are not alone in wondering how to work around this. This is where business and accounting advice is important, as you will need guidance.
Here are three steps to help you find the right person to help you:
1. Search for a company
Do an internet search to find franchise business advisors and accounting professionals. You do not need to find a local adviser as information can be provided via email, phone or Skype. The most important thing is to find someone with extensive experience in franchise business advice, as franchising is a specialised area.
2. Qualify the experience
Ask what experience the team has in franchising. How many clients seeking to buy a franchise has it had over the past 12 months, and what percentage of its clients are involved in franchising?
Also, ask for a reference from a franchisee.
3. Check the fees
Ask the business about the cost of its services. Is it fixed for the advice or charged at an hourly rate? What are the payment terms? Who will be appointed to do the work. Will it be delegated to someone else in the office or to an overseas virtual team?
MAJOR IMPACT
Franchise buyers can regard the costs of professional advice not as an investment but an avoidable expense. However, research by Griffith University and UNSW in 2015 showed that reluctance to invest in due diligence, and particularly in consulting with professional advisers, had a major impact on long-term business success.
The average cost of due diligence (including legal and financial advice) was slightly more than $3200 – a small price to pay considering your investment in a franchise usually amounts to hundreds of thousands of dollars. Improve the chances of success by obtaining experienced accounting and financial advice.
FInally, when your advisor gives her/ his advice, you need to listen carefully. I hear of too many people who obtain advice then ignore it. Listen and think about it. The future of you and your family is too important not to do so.