Five financial conversations for new franchisees
“Honey, let’s buy a franchise!”
Whether or not your spouse or partner works with you, financial conversations are very much a part of business life. It’s best if they start before the doors open.
“Hey honey, looks like we need to invest $100,000 to buy this franchise,” he says. “No worries,” she says, “that’s great… where do I sign?”
Rarely would a conversation go like this, unless it’s in your dreams! The initial rush of enthusiasm to buy the franchise you love will usually get tempered by the need to discuss it fully with your partner, bank and adviser. If you don’t have a partner, you still need to talk through the financial implications for your life.
Investing in a business has financial implications for the whole family. With research showing around 40 per cent of franchisees work with their spouse, it is clear that family support makes a difference to business performance. Full and frank conversations are the best way to set this up from the start.
If you’re thinking about getting into business there are financial conversations to be had. But what should you discuss and with whom?
Here are five financial conversations which will help you clarify and address important financial issues right from the start.
1. Personal and family conversations
Your business will be a huge part of your life, so it’s important to consider how it will fit in your life.
Start off by considering your goals and family life. What do you want from the next few years of your life? What sort of lifestyle do you want? Consider financial and nonfinancial aspects. Discuss this with your spouse if you have one.
Also, it’s helpful to talk to a few business owners and ask them about the impact of business on their family and personal life. For example, what was it like at the start? How have things changed throughout their business ownership?
Once you’ve thought through all this it’s a good idea to write down your goals. Your business will form part of how you achieve them.
Next, think through the financial aspects of business and how it might affect your financial situation.
Hopefully you’ve received financial information from the franchisor or the person you’re buying the business from. At this stage detailed budgets or calculations aren’t necessary, but you should have a sense of how much revenue and profit the business can make and how long it takes to become profitable. You’ll also need to know how much it costs to set up the business. Here are some questions to discuss.
1. What is the upside of taking on this business?
2. What is the downside? What are the risks? What could go wrong?
3. How long might it take to become profitable and be able to pay ourselves a wage?
4. What impact will there be on the family budget? Can we trim our family budget if we need to, and what areas would we make savings in?
5. How much do we need to buy the business and fund the start up period till we can take an income?
6. How much can we make from the business?
7. What will be the impact on other investments? How does this investment relate to wealth creation for the family?
2. Talk to an accountant
Part of the process of investigating a franchise or business opportunity is getting advice from a qualified accountant experienced in small business advice. It’s not just about help to set up a business structure or deal with tax. The idea is to find someone who can work through the financial aspects with you so you understand the implications and can make an informed decision.
With your accountant, work out detailed financial goals and produce a budget and cash flow for the business. This lets you see if the business will generate enough money for you to have the life you pictured.
To work out the budgets, use information about sales and costs from the franchisor. Also conduct your own research if needed regarding customer numbers, rent and other costs.
With your budget, consider what happens to the results at high, low and mid range sales, and also what the figures look like if costs increase. It’s important to do this so you can work out how you’d cope financially under different circumstances.
Now you have detailed figures, again consider your family situation. How do these insights change things?
3. Talk to a banker
Another financial conversation you’ll need to have is with a banker. Running your business finance is different from personal so talk to the experts to get the right types of accounts in place.
Your banker should be able to give you advice on financing options and also account types, credit cards and merchant facilities so customers can pay you. They can also help with superannuation and insurance if needed. Many of the banks have specialist franchise bankers who understand the franchise industry, so make sure you ask for them. The bank will want to see evidence of how you’ll be able to repay loans. So be prepared to show them that. It means having a business and personal budget, and also being able to demonstrate your plan and commitment. So be prepared with a business plan.
4. Talk to a financial planner
Even if you don’t have a financial adviser at the moment, it can be a good idea to get advice from a financial planner who can review your savings, investments and superannuation.
Taking on a business can be a big change in your life and it’s a good idea to take a look at any changes needed to your financial plans. The adviser can also give you advice on what insurance to consider, for example life and sickness or disability cover. Your accountant should be able to recommend a financial planner and work with them if needed.\
5. Talk to a lawyer
Really? Financial conversations with lawyers? Yes, absolutely! When getting advice on the legal aspects of becoming a franchisee, make sure you get an explanation of the financial implications of the arrangements you’re making and contracts you’ll sign.
If you’re in a relationship, it’s a very good idea to get individual legal advice on the financial aspects of business ownership, not just the franchise aspects. This allows both partners to ask their own questions about the risks and responsibilities – and to do so individually. Then you should talk through things as a couple.
Owning a business can be a fantastic opportunity to build wealth and achieve family goals. But don’t neglect the financial conversations.
Peter Knight, FCPA and Kate Groom of Smart Franchise are experts in financial communication. They run workshops and seminars, and present keynote speeches that help people discover the secrets of sustainable profit and cash flow.
Smart Franchise is a financial education and consulting firm that specialises in financial communication for franchise businesses. They help business owners, managers and their advisers understand and use financial information to improve business performance.