Ask George?

I run a small mobile franchise and I am thinking about sponsoring my local football club. Is that a good idea?

I think that it is a great idea.

We all love and follow our sport passionately. And when your kids start to play sport as well, we contribute by coaching; others by being involved as team managers and administrators; and others by helping around their club in all the endless jobs that need to be done every week.

As a business person, sponsoring your local sporting club can pay dividends in the long run for your business and at the same time helping to ensure that your local club has the money that it needs to run an effective sporting program.

It is a very simple and effective way of becoming involved with and interacting with your local community.

Here are some of the benefits that my business, Bathroom Werx has gained over the many years of contributing to local basketball clubs around our area :

1. Kids have grown up seeing the Bathroom Werx name in their stadiums, newsletters, on singlets, and other areas. It provides a positive perception of our brand in an atmosphere where people are having fun.
2. Kids grow up and enter the workforce – we have had a few applying for jobs at Bathroom Werx.
3. The number of parents, grandparents, aunties, uncles and friends that attend games and events to support their kids is staggering.
4. The goodwill that it generates for your brand in supporting your community would otherwise cost you millions of dollars if you had to do it through traditional means of advertising.

It reaches right into the heart and soul of your local community! Try it but take a long term view if you want it to work for you!

When is a good time to apply for a loan to buy a franchise?

Start looking at finance options the minute you decide you want to buy a franchise business.

If you are currently employed, I would look at establishing lines of credit with my bank on property/assets that you own before resigning your position. Get advice from a Financial Advisor or an Accountant on how much money you can borrow on your current assets.

Once you know how much money you can access then you can decide on which franchise system you can afford to buy. It can be just heartbreaking after spending a lot of time researching the market to find the business that is right for you only to find out from the bank that it is way out of your price range and you can’t fund the acquisition.

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, and not to borrow more than 50 per cent. And the reason for this is simple.

Let me give you an example.

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 end 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 business.

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 not to 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 all up 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 has to be in cash from your own resources – not borrowings against other assets.

Business loans are generally short term loans of five to ten years (generally they will match the term of your franchise agreement), and have higher interest rates and fees. This means that your loan has to 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 has to be repaid over five years which is $1,100 per month (at an 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.

George is CEO of the Bathroom Werx Group. A CPA by profession and started his business as a franchisee in 1986 after a career in merchant banking and finance. He then became the franchisor in 1988 and began franchising in 1990. George is one of Australia’s leading exponents of service franchising and is the Past Chairman of the Franchise Council of Australia.

Bathroom Werx renovates over 200 bathrooms every month around Australia for their customers.

Contact George at:
Email: george.yammouni@bathroomWERX.com
Web: www.bathroomWERX.com