ARE YOU PAYING TOO MUCH?

When buying a franchise, an independent business or any other kind of asset, how do you know when you’re paying too much?

Signs you are investing too much in your franchise.

For many people, a franchise will be the largest investment they ever make other than buying a home. There are many similarities in the journey between business and home ownership, particularly the strong emotional drivers that make us see ourselves as our own boss, or the owners of a particular home.

Typically with the process of buying a house, we keep looking until we find “the one”, then we just have to have it. Yes, we will try to buy in our price range, but more often than not we will stretch ourselves to a higher price limit because we have fallen in love with the property.

At least to help us in the home-buying journey there are massive amounts of information to inform us of the relative market value of the property. A search of several key Australian websites will reveal – among other things – the median housing price for the suburb in which the house is located, the price at which the house last sold and when it sold, and include comparative prices of other houses in the area which have sold in the last few months.

Along with the ability to conduct inspections of the house you would like to buy and visits to many others in your journey, discussions with real estate agents, buyers and sellers, you can quickly develop a sense of whether the property you will buy is good value or not.

BUYING A BUSINESS IS NOT LIKE BUYING A HOUSE

And even if you have paid over the odds for a house, you still have a house. You can live in it, rent it out, improve it and turn it into something better. But you still have a physical, tangible, meaningful and valuable asset.

Businesses are completely different. These are highly volatile assets which can decline in value very quickly if they are operated badly. (Yes, a house can decline in value too, through neglect and a lack of maintenance, but unless it actually burns to the ground, its value will generally be preserved or improve over time).

Most important, though, is that the information available prior to buying a business is nowhere near as comprehensive as for buying a house. You are flying largely blind and depend on the figures provided by the seller (if it is an existing business), so here are some rules of thumb to consider to avoid paying too much for a franchise.

SEVEN SIGNS YOU MIGHT BE PAYING TOO MUCH

1. If you are unable to repay the principal and interest of your business loan during the first term of the franchise

2. You can only repay the principal and interest of your business loan during the first term of the franchise by not paying yourself a sensible wage for the work you perform.

3. If the seller of the business is not completely transparent and honest about the past trading history of the business, and about its current operating costs.

4. If you have not looked at other outlets of the same franchise nor spoken to a representative sample of both current and former franchisees.

5. If you have not put together a business plan to show how you can grow this business, and have not intensively researched every element of the plan beforehand.

6. If, after buying the business, you will have no spare cash to actually fund the operations of the business (i.e. working capital). 7. If you haven’t conducted your own detailed evaluation of the franchisor, and asked them what might be different in their support of the business under new ownership.

You need to slow down, take a good look at yourself and at the proposed sale conditions, the lease agreement and rental costs. Take some time to get advice and get your family involved in the decision.

Jason Gehrke is the director of the Franchise Advisory Centre and has been involved in franchising for more than 20 years at franchisee, franchisor and advisor level. He advises both potential and existing franchisors and franchisees, and conducts franchise education programs throughout Australia.