Sound Financial Foundations for your Franchise
This article appears in the July/August 2014 issue of Business Franchise Australia & New Zealand
Have you ever played the game Snakes and Ladders? Landing on a snake when you’re almost at the finish is such a disappointment as it sends you backwards just as you’re anticipating your win.
The financial side of buying a franchise can sometimes feel a bit like this. You’ve heard lots of positive things, you like the franchise concept, and are keen to go ahead … and then you’re advised to consult an accountant. What if they cast doubt on your plans?
Do you really need to do the numbers, and get advice, even if you’re very confident of the business? We think you do. Let us explain.
Money matters when you’re buying a franchise
A franchise is a business with money involved, so it’s important to think carefully about the financial implications. In fact, the Franchising Code of Conduct states prospective franchisees must be advised to obtain independent accounting and business advice.
But many experts have noted that people tend to neglect the financial side of franchise research. Some choose not to consult an accountant, or instead seek advice from a family friend rather than an independent expert.
We think it’s a mistake to assume the financial side will work out okay because you’re buying a franchise. You’re investing in a business - don’t just hope for the best!
As a franchisee, your income depends on the financial results of your business. Also, you will be investing your own money – and will probably borrow from a bank. So it’s important to get an indication of how the bills can be paid, the loans repaid, and how much you might make.
If you’ve never bought a business before you might wonder what questions to ask and what’s the role of an accountant. Here are some pointers to help you.
Three financial questions to ask
Here are three financial questions to ask when you investigate a franchise opportunity.
The answers will help you assess whether you can afford to start the business and what profit it might make. You can then consider if it’s enough income to live on.
1. How much will it cost to start the business? This includes franchise and training fees, equipment and fitout. You’ll also need enough money to cover expenses until the business is profitable.
2. What will it cost to run the business day-to-day? For instance, rent, wages, materials costs, advertising, royalties, leases, phones,electricity, accounting and bookkeeping.
3. What sales are needed to cover the costs? You can then assess whether there’s a reasonable chance of achieving this target, and how long it will take to reach it.
Where to find financial information
The information to assess the financial side of a franchise will come from a variety of sources, so be prepared to do some digging around to get the answers.
A good place to start is the Disclosure Document. Franchisors are required by law to provide this.
The Disclosure Document should include details of set up costs and expenses to run the business. Some franchisors also include information about the past sales and expenses of current franchisees, which can be very helpful.
You can also ask existing franchisees about their sales and costs, as well as their start up costs.
With this information, you should be able to get a rough idea of the start-up costs for the business, and also get a sense of how much you might be able to make.
Dig deeper into the numbers
If your initial assessment looks promising the next step is to dig deeper into the numbers. This is where you prepare detailed financial projections based on information about the sales and each of the operating costs of the business. You’ll also want to get a clearer indication of the startup costs.
It’s important to take into account your specific costs, such as rent, wages, loan payments and other financial commitments. With regard to sales, be sure to allow for realistic growth and seasonal sales patterns. Now take a step back and consider whether the projections show this business can make a healthy profit. Based on your research of the franchise, are the projections achievable? Will this franchise give you the income you need?
Consult a ‘Franchise Friendly Accountant’
When you’re buying a franchise it’s a good idea to get advice from an accountant who understands franchising. In fact, the Franchising Code of Conduct recommends it!
The accountant can help you put together financial projections. But there’s more to it that just completing a spreadsheet. You see, with all your enthusiasm for the franchise, a reality check will be very helpful. That’s where an accountant can help.
Accountants tend to be conservative in their approach which means they can help you see what might happen in the worst-case scenario. But they can also help you with the best-case scenario as well. They can highlight the risks that can increase your costs or reduce your profit, so you can then work out how to reduce them.
When choosing an accountant, it’s important to understand there are different types of accountant. Some focus on personal income tax - you might have used one to do your own tax return. Others mainly work mainly with established businesses, while others specialise in franchising.
So, when you’re starting a franchise, it’s best to consult an accountant who understands franchising and is used to working with small business.
Set sound financial foundations
It’s easy to feel confident about an opportunity when you see franchises up and running. But even with the most well established brands, we believe it’s a mistake to assume the financial side will automatically be okay.
Your income will depend on the business results, you’ll be investing money in it, and probably taking on debt. We have found, even experienced business owners mostly obtain business advice before making their purchase.
The right accountant won’t be a roadblock in the way of your dreams. Instead they will help you get a more complete financial picture, so you have the best chance of achieving the outcomes you desire.
The financial side of running a business is really important and needs to have your attention. Take the time to do the numbers and consult professional advisers to give you a good start in business.
Climb the ladder whilst avoiding the snakes!
When considering a franchise, you’ll need to know how the bills can be paid, loans repaid, and how much you might make. Key questions are: How much will it cost to start the business? What will it cost to run the business day-to-day? What sales are needed to cover the costs?
Always prepare detailed financial projections that take account of your specific costs.
Assess the projections against your income needs. How confident are you of the results?
Before you buy, consult an accountant who can help you assess the opportunity.
Peter Knight, FCPA and Kate Groom are co-founders of Smart Franchise and the Franchise Accountants Network. Peter is an accountant with over 25 years in professional practice. Kate has worked with franchise businesses for almost 20 years, focusing on strategy, planning and business improvement.
Franchise Accountants Network members are qualified accountants with experience advising franchise owners on business and financial matters. You can find members in Sydney, Newcastle, Melbourne, Brisbane, Perth, Adelaide, Albury-Wodonga and Dubbo.
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