Asking the experts
New to franchising? Your Questions answered
During my 31 years in business – running a national franchise service operation specialising in bathroom makeovers – I have been asked many questions by people from various backgrounds, looking to get into their first franchise business.
Of course, many are related to our business and the details of the day-to-day operations, however I have selected the most common questions I have been asked over the years and answer them for you below.
As you read through this, I hope it provides insight and assistance in your quest for the right business opportunity, for you and your family.
I want to get into business for myself – where do I start?
Firstly, make sure you have the support of your partner and family as being in business is going to consume a lot of your time.It’s important that they are behind you in this undertaking.
Then, start saving money. You want to have at least half the purchase price in cash, this will mean you don’t have to borrow more than 50 per cent which will take a lot of pressure off you.
Next, think about what sort of business you are going to enjoy getting up for every morning.
Look at the skills you currently have – can you use those skills in your own business? If you can, that’s one less thing to worry about as there are plenty of new things to learn when running your own business. If you are going to be doing something completely different, see if you can go out and work for someone who is already in this business for at least a week. Make sure you like doing this work and enjoy it! Take annual leave from your job if you must; work for free if need be – this will be the most valuable thing that you do and will help you enormously in making your decision.
If looking to buy an existing business, then I would recommend a two-week trial shift with the current owner. That way you get to determine whether you like the work, confirm the weekly sales of the business, see first-hand how it runs and what is involved on a day to day basis and gain many more valuable insights into the real business.
There are lots of websites that you can visit to find out more about the business you want to get into and the industry that it operates in. It is very important you have a good idea of the big picture and how that can impact on the business you are looking at.
It’s not that hard. You just have to make the decision and make a start. The more research and preparation you do, the better chance you give yourself of success.
What sort of franchise business would you like?
To find the franchise business for you, ask yourself the following questions:
- Can I see myself getting up every morning and running this business?
- Does it excite me?
- Does my family support me in my decision to buy this business?
Getting into business is a serious undertaking that is going to consume a lot of your waking hours. So, it is a good idea that the business is something that you enjoy doing.
You will be putting a lot of hours into your business, especially in the first few years, so having the support of your family is very important.
Do you have control over decisions in a franchise?
Franchising is about the synergy that develops from two people combining their entrepreneurial spirit to grow and develop their mutual business – the aim of this synergy is to create wealth for both.
This means that in running the business you will have certain functions to perform to make sure that you are successful and your franchisor has certain responsibilities to ensure that the value of the brand, and therefore your business, continuously increases in value.
If you look at franchising this way you will soon realise that you are getting into business with a lot of people – they all have a stake in the business, they all want to be involved in decisions and outcomes that affect them.
The way you run your franchise business has an impact on every other franchisee in the system and them on you. You can start to see how important the franchisor’s role of keeping everyone ‘singing from the same hymn sheet’ becomes crucial to the success of the brand.
So back to the question, of course you have a say. You control the day-to-day and the interaction of your customers with your employees and with the brand. Every day you should always ask yourself how you can run things better, so that your customer is the winner. These are the sort of answers that your franchisor is always searching for and this is where you have a big say in the business.
The other side of this is that you are one part of a big team… your brand – and that requires discipline from you to play your part on that team.
There is nothing to be unsure about in running a franchise business. The functions that determine the success of your business have been identified and systems are in place to help you carry them out. All you have to do is follow the SYSTEM.
In general, this is one of the most important factors that makes franchising more successful than small business.
How much of the purchase price should I borrow to buy a franchise?
My recommendation is to have at least 50 per cent in cash, which means you will not need to borrow more than 50 per cent and the reason for this is simple.
Before you go and buy a house, you have already determined what price range you can afford. You know how much you have saved up and you have already been advised the maximum amount you can borrow – this is based on your level of income which determines your repayment which then determines the maximum amount you can borrow.
So, armed with this information you now have a budget for the maximum amount you can spend to buy a house. The result is that you are going to end up with a house that you can afford to pay off each week based on the income that you earn.
You should follow a similar process when buying a franchise in Australia.
Most accountants would advise you to never borrow more than 50 per cent of the capital required to get into that business and I have to agree with that.
For example, if you are buying a business that has a total purchase price (including all the costs of acquisition of $100,000, my rule of thumb is never borrow more than 50 per cent of the annual net profit of the business (before interest, tax and owners’ wages), or 50 per cent of the purchase price of the business, whichever is the smaller figure. Don’t forget that loan repayments have to come from the profit that the business makes.
The rest of the money should be in cash from your own resources – not borrowings against other assets.
Business loans are generally short-term loans of five to ten years (usually they will match the term of your franchise agreement), and have higher interest rates and fees. This means that your loan should be repaid over this time period therefore increasing the monthly repayment amount. Can the business afford to pay that each month?
In this example $50,000 must be repaid over five years which is $1,100 per month (at a 11.5 per cent interest rate). Can the business afford this each month? If it can, will it leave you with enough money to live?
These are simple enough calculations which I would highly recommend doing first when deciding first how much you should borrow.
There are plenty of challenges in running a business – why burden yourself with the extra stress and worry of borrowing too much.
Becoming a Multi-unit Franchisee
You’ve made the decision, you’ve done all your homework, organised your finance, finished the training and now you’re there… running your own franchise business.
Life sure has changed a lot since you started in business – it’s exhilarating and you love every minute of it. So, what happens next?
One of your options for the future is to expand your business by opening another store in your franchise network i.e. become a multi-unit franchisee. This option is being explored by more and more franchisees now as they grow their businesses to the next level.
It makes a lot of sense to use the knowledge you’ve gained in running your new business and leverage that into two, three, four or more stores inside your franchise system. It also makes more financial sense to do this rather than put your money into other investments – whose returns you have no control over.
Plus, your business has a much higher rate of return that most investments in the market place. Isn’t that why you got into business in the first place?
A lot of franchisors are now encouraging this trend, as it makes a lot of sense to encourage existing franchisees to expand and grow their businesses. It keeps top performing franchisees in the system and gives them the opportunity to set goals which form part of their long-term business plans.
It also gives franchisees the opportunity to develop and grow substantial businesses, which not only add value to the brand but also become huge wealth generating assets for the franchisee.
Here are some things to think about before you go down that road:
1. Learn the business first
It is critical that you have a very good understand of the key drivers of your business.
Concentrate on developing your skills in the key areas of the business:
- managing and developing your team,
- establishing a management structure,
- ability to delegate,
- local marketing and customer service,
- continuously reviewing your performance,
- business and financial planning.
As a multi-unit franchisee, your focus must change from operational to more strategic. You are going to have to develop your financial skills, as well as staff recruitment and management skills. If you have these skills from your previous work life experiences, you are ahead of the game already.
Measure your performance against other franchisees in the system. This way you can start to gauge whether you are achieving good market penetration in your current store before you move on to your next one.
2. Organise your finance to ensure you have enough working capital to finance another location
You are going to need money in the bank or credit facilities to finance your expansion.
This can include the following:
- franchise fee,
- store fit out,
- staff recruitment and training,
- management team to run new location,
- opening marketing promotion, and
- working capital.
Take the time to do this as going into your second store highly leveraged is a recipe for disaster. If you had to borrow a lot of money to start your first store then make sure that you have paid a good part of that off before starting your next store.
Sit down with your accountant and do some serious financial modelling, making sure that you understand the cash flow implications of a second store. I also recommend break-even analysis so that you know what sales levels are required in the second store and the impact it can have on your overall profitability.
Running a profitable first store is crucial to your success, as its cash flow will be very important in the early months of your new store. That is why it is crucial to have a profitable business before you start your expansion.
3. Do your market research – again
Choosing the location of your next site is just as important as the decision you made to choose the location for your first store.
This time you know more about your business and your customers and this knowledge is going to help you enormously in analysing and choosing your next location. Thoroughly research your site selection, and work with your franchisor to ensure you have chosen the right site.
There are a lot of factors to consider and sometimes you just have to be patient as you wait for the right site to come up.
If it’s not right, don’t jump in – there is no hurry to jump into a second-rate site. Don’t forget you already have an existing business to run. Your franchisor is going to be an enormous help to you here, as they are going to have their own research in this area and will be able to provide you with some very important information.
4. A strong management team and infrastructure
Building a strong management team and an administration infrastructure to run your business is critical as you move into the next phase of your business growth. leveraged to grow your business and add even more stores.
It provides pathways for your staff where you can offer rewarding careers for your most talented staff members, offering them a variety of different roles at different locations. This will help you retain and attract great staff.
This is probably the most expensive part of running your business but the good news is that this infrastructure can handle multiple stores and it is this leverage that will make you serious money in the long term.
The management system and infrastructure you run is the backbone of your business. Make sure that you are using the latest technology available to keep your administration costs down. It is vital that it gives you the leverage to grow the business without having to resort to increasing your staff numbers to cope with the growth.
5. Talk to your franchisor
As soon as you start thinking about expansion, talk to your franchisor. They will have the experience of helping other franchisees that have followed this path and will be able to provide you with a checklist of all the things you have to do. There will also be clauses in your Franchise Agreement that govern this and you will have to check whether your Franchise Agreement allows you to do this and that you are eligible for a multi-store franchise operation.
The good news is that franchising is about replicating success… in many locations. Somebody else has already done all the hard work in working out the best systems that will run a multi-location franchise – following the model is a recipe for success that reduces the risk of expansion and helps you generate more wealth for you and your family.