WILL I MAKE MONEY FROM THIS?

There are no guarantees, but doing your homework first is the best way to decide whether franchising is for you.

The big questions for a franchise buyer.

Like any acquisition or new business venture, buying into a franchise needs careful consideration. Franchising provides amazing opportunities to leverage a well-known brand, quickly generate revenue and profit, and potentially create a great lifestyle.

But it’s not for everyone, and you’re never guaranteed to make a profit – even if other franchisees of the same franchise system are doing so.

Here are a few considerations when it comes to better understanding your potential to make money from a franchise.

HOW MUCH MONEY CAN I MAKE FROM

BUYING A FRANCHISE?

Understanding how much money you can make from a business is a complex question. It’s ultimately the sum of many moving parts, including your product or service, brand equity, marketing strategy, customer experience, operational efficiencies, and the personal effort, skills and experience you offer as the business owner. And, of course, there’s your people … and that’s a whole other story!

Nothing is certain in business; however, being part of a franchise system provides a fantastic opportunity to get information (benchmarking data) from many sites, just like the one you’re looking at, so you can make a more informed decision about whether the investment is right for you. To get an indication of how your site might perform, ask the franchisor for access to data about other franchisees.

Try to gather data from a wide variety

of franchise operators, including:

• sites similar to the one you’re looking at, including size and demographics of the clientele

• sites that are close to yours

• top-performing sites

• average sites

• the worst-performing sites.

You’ll need to take a close look at the books, keeping in mind that franchisors will put their best foot forward. As a potential franchisee, ensure you have your head around a few key metrics: revenue; gross profit; earnings before interest, taxes, depreciation and amortisation (EBITDA); earnings before interest and taxes (EBIT); net profit; and net profit after tax (NPAT). These figures all contribute to a business’s ability to generate profit, which is crucial to its continued success.

And here we come back to people. One of the major costs of almost any business is wages. As a franchise owner, you want people you can rely on to do a great job – but you can have a major impact on the profitability of the business through the amount you personally work within the business. The more hours you work, the less you are paying someone else and the greater the profit! Sounds obvious but you’ll need to weigh this up with the lifestyle you want to lead, and the skills and expertise you can offer.

Modelling all these figures with your accounting advisor will allow you to consider different scenarios and impacts, while giving you an understanding of what levers you can pull over time. Don’t underestimate the importance of these forecasts.

Of course, the true number that counts is cash in your pocket at the end of the day. Make sure you’re across all the franchise costs, including franchise fees, equipment purchases, loan repayments and taxes.

This should all be outlined in the franchise agreement and disclosure document.

The franchise agreement will outline the obligations relating to performance criteria, payment of fees (royalties, marketing fees, training fees, transfer fees, termination fees, utility levies etc.), marketing expectations, reporting frameworks, training support, supply of products and services, territories etc.

The disclosure document will provide estimates of the establishment costs and the costs that you will likely incur in operating the business. This is just a starting point so, again, make sure you really dive into the financials.

If you’re required to pay a percentage royalty, it’s important to note that this is calculated as a percentage of your gross revenue (not your profit). This means that you’ll be required to pay those fees to the franchisor regardless of whether the business is running at a profit.

To fully understand your money-making potential as a franchise, you should have an experienced franchise attorney or franchise consultant review the franchise contracts and disclosure documents.

HOW EASY IS IT TO SELL A FRANCHISE

BUSINESS?

When it comes to selling your franchise, make sure you bring a buyer’s mindset. Reconnect with why you bought the franchise in the first place and make sure you can talk to those reasons when in discussion with a potential buyer.

In addition to the reasons why you bought the business, a buyer will consider the performance of the overall franchise system and the performance and profitability of your site or store.

Hopefully, you will have been making good profits throughout your journey as a franchisee as this will increase the value of your business, but you should also be aiming for capital gains at the time of sale, so consider if the timing is right.

Generally speaking, franchisees have the right to sell their business during the term of the agreement, subject to the franchisor’s consent. In some cases, a franchisee may have to offer to sell the business to the franchisor before selling it to a third party.

If you’re selling to a third party, the purchaser will have to pass the franchisor’s approval process, which may include an interview with the franchisor. The buyer will most likely also have to provide financial information and business references. If the franchisor is not satisfied that the prospective purchaser is capable or suitable to run the business, they will generally have the right to withhold their consent to the proposed sale. Similarly, if you’re in breach of the franchise agreement, this is often grounds for the franchisor to withhold consent to a proposed sale.

Franchisors can generally require a purchaser to enter into the current version of the franchise agreement on sale of the business, which can include significantly different terms to your agreement. This can impact the sale of the business.

Ultimately, buying (and selling) a franchise can be a great way to make money if you’ve done your due diligence, financial modelling and market research and have confidence in the profit potential.

Our key call-outs are to talk to as many franchisees as possible, consider the role you will play in the business, and engage trustworthy advisors to ensure you properly understand your obligations under the franchise agreement and the information that has been provided by the franchisor in the disclosure document. If it all stacks up, you’re most likely in a good position to make money through investing in a franchise.

Aaron March is director of BlueRock Accounting and Melissa Strain, associate director of BlueRock Law. BlueRock is an Australian entrepreneurial advisory practice that works with founders and business owners to connect them to an incredible community and help them reach their business and life goals.