Know Your Price Range
The golden rule when it comes to making any investment is to know your price range. Whether it’s purchasing a car, a house, or investing in your own business, the first step should always be to know your financial parameters. Not only does this ensure you don’t end up purchasing a business you can't afford, but it also narrows down your search of investment options.
According to the Australian Bureau of Statistics (ABS), more than 60 per cent of Australian small businesses fail within the first three years of operation. Although this is due to numerous factors, one of the leading reasons is new owners underestimating the financial impact of starting their own business.
It should be noted that becoming a franchisee does come with certain benefits that you otherwise don’t have access to if you start a business from scratch. Operating under a recognisable and established brand, training, and access to resources are just some of the services on offer to you when becoming a franchisee. Don’t forget that these measures get factored into the price you pay to become a franchisee. But understanding your price parameters is not as simple as going down to the shop to purchase groceries and making sure you have enough money to complete a transaction. Once you purchase a business, there's no turning back, so any prospective franchisee needs to be conscious off all relevant expenses.
Asides from the obvious upfront fee, the initial costs include obtaining assistance with tasks such as staff recruitment, obtaining a lease, fit-out expenses and any training that is required. As a guide to how much this may set you back, according to the latest Franchising Australia Report, published by Griffith University, the average upfront fee for a retail franchise in Australia is $31,500.
The ongoing fees, however, are ones to pay close attention to. This type of cost is usually based on a proportion of the gross revenue and forms part of the agreement between franchisee and franchisor. This is important as it means that the higher the turnover of the business you purchase, the more likely that you'll end up paying a higher ongoing cost while other costs associated with becoming a franchisee may relate to items such as the business structure, buyer costs and expenses involved in setting up any company trusts.
To ascertain your price range, first, you should conduct a careful review of your financial position. This will reduce the likelihood of finding yourself in a situation where you’re overstretched financially, as well as provide a full scope of investment options that are available to you.
Managing risk is something that any shrewd business investor does well. Start by compiling a list of all present assets and liabilities, as you will need to have sufficient equity should you need to obtain a loan from a financial institution. Following this, you then need to resolve if you’re prepared to put at risk any assets you’ve accumulated (such as a house) if the business venture does not work out as planned.
However, make sure to enquire as to whether any prospective franchisor is accredited with a financial institution. If this is the case, it means that as a franchisee of that business, you can borrow a percentage of the purchase cost of the franchise. This loan is made against the value of the franchise business, which takes into account criteria such as stock, assets and license fees. Asides from providing less risk, it also means that you would be dealing with a financial institution with an intimate understanding and expertise in the franchise game.
Another important aspect is to ensure that you choose the right franchise for you. This does not necessarily mean the cheapest, nor does it automatically mean one with universal popularity. A cheap franchise may be cost-effective, but in a market economy, you often get what you pay for. The lower cost may be due to factors such as it being a brand with low name recognition, less revenue generated from sales or that the franchisor only provides limited resources to its franchisees.
Moreover, investing in a well-established brand with a high degree of popularity among consumers also comes with its drawbacks. For instance, if you purchase a fast-food franchise, you'll probably be operating under a business with high brand recognition, and that appeals across multiple demographics. However, you would also be likely to face stiff competition – not just from other fast-food chains, but indeed from other franchises from the same business if it is one whose stores are densely populated across Australia.
But the key to doing good research isn’t just assessing your own financial position and weighing that against the terms and conditions of a proposed agreement with a franchisor. The disclosure documents may itemise the costs and expenses for which you will be liable, however, that alone does not give you a full picture of the business venture you’re entering.
Obtaining an understanding of the sorts of income you can expect to generate is done by conducting thorough due diligence that includes examining the industry, discussing the business with multiple franchisees from the same brand and conducting some market analysis more broadly. These are measures that are not contained in any contract, nor are they things that can be researched in five minutes. However, they are essential to determine a full financial picture before undertaking an investment accurately.
It may well be the case that you need to engage an expert to ascertain an accurate snapshot of your financial position. Consulting with a financial advisor before investing in a franchise may come at a small cost, but if that accurately determines your price range and prevents you from paying something you can’t afford, then that ends up being an investment in itself.
The key take-home is to make a careful and considered decision. Don't rush into a decision, compare the various models offered by each franchisor and understand the pros and cons. Becoming a franchisee could well be the single biggest financial investment you ever make, and it's essential you get it right.