To buy or not to buy a franchise
Six reason as to why you would, or would not, buy a franchise.
Six reasons to buy:
1. Less chance of failure: the survival rate for franchises against small businesses is better by around 77 per cent to 33 per cent.
2. You are buying a developed business idea with proved delivery systems and support behind it.
3. You don’t necessarily need specific industry knowledge.
4. You don’t need extensive business experience as you have access to training, advice, assistance, marketing and advertising.
5. Savings from the franchisor’s centralised bulk purchasing of product, equipment, supplies, advertising.
6. You are operating a tried and tested brand with a proven market position.
Six reasons not to buy a franchise:
1. Could be more expensive to set up than your own independent business.
2. Contractual issues need to be carefully considered.
3. Competitive restrictions on price, type of product sold or service offered and area in which you can operate.
4. A franchise gives you less independence than your own business model.
5. Other franchisees may weaken the brand name and hence adversely affect your business by association.
6. There is a risk your franchisor might fail.
The fine print
Your franchise agreement is the legally binding document that cements the relationship between you and the franchisor. It outlines the rights and obligations of both parties and reflects the outcome of your negotiations.
Go over this document carefully. You are entitled to a 14-day cooling-off period after you have signed, but don’t rely on that to get you out of trouble.
Look for support
Franchises are seen to be a popular entry into small business because they offer support for the business owner. Ask the franchisor what kind of assistance they offer. Check to see if they provide a free comprehensive ongoing training program, help with site selection, layout or design of premises, and assistance in negotiating the lease or helping with accounting, bookkeeping or stock purchasing.
Check the contract
Check that the franchise contract has not been written to the advantage of the franchisor, and that it doesn’t call for unreasonably high sales quotas from their franchisees or for mandatory working hours. Most franchise agreements will have an expiry date and there may be no guarantee that they can be renewed.
Even if renewal is guaranteed, the terms may not be favourable. Contracts also specify conditions for the cancellation or termination of the franchise by the franchisor and restrictions on the franchisee selling their franchise or otherwise recovering their investment. Remember, that as a franchisee, although it appears that you are your own boss, in fact it is the franchisor who calls many of the shots. This is in order to ensure uniformity across the brand but these controls may severely restrict you from exercising your own business judgements.
These restrictions might include issues such as site approval, design or appearance standards, restrictions on goods or services offered for sale, restrictions on the method of operation and competitive restrictions, such as the way you establish your selling prices. All these issues should be covered in the contract. If they are not, go back to the franchisor with your questions.
Look at the downside
Franchising has a better record of survival than most independent small businesses, but you need to be aware that not every franchise succeeds. It is for this reason that you need to scrupulously evaluate your franchisor, the product or service and the system of distribution.
Follow the money
A business plan and cash flow projection will keep you on track. They are vital tools if you want to work smarter rather than harder.
Take time to develop your business plan, outlining your goals, your strategies, your prospects and how you will achieve them. Each business should have its own unique plan. While it’s good to work from a template, throw out any headings that don’t specifically apply to your business. Don’t treat this as homework, but as a serious analysis of how your business will work. Your plan will help you test your ideas and decide on strategies to reach your goals. Planning enables you to recognise problems that call for outside sources of information and assistance. The nature of markets and consumer needs change rapidly. Planning cannot predict change, but it can help you to recognise it and to construct your business strategy accordingly.
Planning helps you to achieve smooth growth and to avoid unexpected crises. A business plan enables you to monitor your results against a set of goals and performance standards.
A business plan and cash flow projection will keep you on track. They are vital tools if you want to work smarter rather than harder. Your plan is your roadmap to success. It needs to be fluid and flexible, reviewed and revised at regular intervals throughout the business year. If at any time you are forced to take a detour in your strategy, your business plan will help you find your way back onto the main road. For help in preparing a plan and to get a useful template that you can adapt to your needs, see the Commonwealth Government’s Business
Entry website at www.business.gov.au.
Your banking needs
Before buying your franchise, talk to your bank. They have a lot of experience in helping people buy franchises and know the issues you face. They have dealt with many franchisors before and will know what you will need to do to get established. They may even be familiar with the one you plan to buy into.
The relationship with your bank will be important to your success. Find out what services they have that can free up your time and improve the efficiency of your business. Even such apparently simple things as using online banking, and getting advice on how to structure accounts to suit your particular business needs, will free up your time and allow you to work ‘on’ the business rather than ‘in’ the business.
Cash flow: A steady stream
Poor cash flow is one of the main reasons that small businesses fail. The important thing to understand is that many profitable businesses can go broke because they didn’t have enough cash flow to support their business in the short term.
A month-by-month cash flow budget will help you forecast whether you have sufficient cash in the bank to pay the bills each month – and help you sleep better at night. A cash flow budget simply records the amount of money that you expect to flow in and out of your business over a given time frame – usually 12 months. This cash flow budget should be based on a series of assumptions about how your business has performed in the past and what you expect to change in the future. If you are starting a business from scratch and do not have previous records then it is even more important to back up your cash flow assumptions with market requirements, planned fixed expenses and information on similar types of businesses. Make sure you do your research.
Once you have completed a cash flow budget make sure you use it as a living document. Track your projections against actual receipts and expenses when they are made. This will help keep your finger on the pulse, manage expenses and income and plan for any unexpected issues in advance.
It’s also important to understand where cash can get tied up in your business – primarily stock and debtors. If money in the bank is tight each month you may need to ask yourself some of these questions:
• Do you use a cash flow budget?
• Do you make collecting accounts a priority or are you too busy?
• Do you have a clear debt collection system in place?
• Do you need an overdraft facility to smooth out your cash flow?
• How do you manage your stock and do you have too much stock?
For further information about cash flow and the above key questions, obtain a copy of the Westpac cash flow guide and ask your bank for a copy of a cash flow budget and any training they may provide which may help you manage cash flow and improve your business performance.
Sharen Verrenkamp is a Business Development Manager with Westpac. She specialises in the franchise sector and holds a Bachelor of Business.
Westpac continues their long- term commitment to franchising in Australia. The bank has a national network of franchise specialist business bankers who are able to deal with the specific needs of the franchise sector
Contact Sharen at:
Phone: 0438 426 319