SPEND YOUR SAVINGS WISELY
How to put your nest egg or redundancy payments to
good use in a business.
by Kate Groom
David finished up a senior role with an international company and was too young to retire, so he looked around for a franchise business to buy. He was hoping to occupy his time, make an income and get a return on the investment he made from his savings.
After some searching, David settled on buying a franchise that was well established. The franchise brand was well known and the franchisor team was highly experienced. The figures from the previous owners showed that the business was very profitable. Although
This example is not unusual but it doesn’t need to be this way. Sadly too many people who have ready funds available from savings or redundancy make the mistakes of not thinking through their business decisions and failing to seek appropriate advice.
Are you looking to buy a franchise and pay for it with savings, an inheritance or a redundancy payment? If so, here are three valuable lessons from David’s experience: 1. Consider carefully why you want to buy a franchise. Be sure you are willing to work at it and invest if needed!
2. Think like a bank when it comes to
investing your own money
3. Assess whether the business is
reasonably priced.
1. WHY DO YOU WANT TO BUY A
FRANCHISE?
Are your goals written down? People often miss out this stage, but it’s vital. Even if you don’t have written goals, you have a goal of some sort in mind when you’re considering a franchise. So why not take time to commit your thoughts to paper?
Take some time to consider two questions: “Why do I want to be a business owner?” and “Why do I want to buy a franchise?” Note down your answers - it will help you clarify them.
Your reasons to buy a business might include some or all of:
• Generate an income to live on
• Make use of my business and life skills • Make a return on my capital
• Do something with my time
• Learn new skills
When it comes to reasons to buy a franchise, you might be attracted by the support, the fact that the business model is established, or the fit with your skill set. Perhaps you see it as a way to learn how to run a business without some of the risk of starting from scratch.
And please remember that owning a franchise is not a passive investment. Remember David? He didn’t have the commitment to work hard in the business or to make the investment needed to keep it up to date. It’s not smart to buy a franchise unless you have an understanding of what work is required, and a genuine commitment to do the work.
2. THINK LIKE A BANK
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 they would charge interest.
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.
3. CONSIDER WHETHER THE PRICE IS 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.
Let’s think back to our example of David and his franchise purchase. He saw that the business was profitable and paid a premium for it while neglecting to understand the need for future 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?
And finally, our bonus piece of advice. No matter how much or how little money you have to invest, there’s no sense in buying a franchise that is in a business you can’t see yourself enjoying or are not suited for. A franchise is a long term investment (usually at least five years) and one you will need to work at. So take your time and think carefully about it. Seek advice from independent professionals who understand the franchise sector and will help you assess the opportunity. Hopefully that will help you reap the benefits of investing in a franchise.