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BUYING A FRANCHISE IS A LOT LIKE BUYING A MOTOR VEHICLE

By David McCulloch, The Franchise Coach

BUYING A FRANCHISE IS A LOT LIKE BUYING A MOTOR VEHICLE

For many reading this magazine, this is their first tentative steps towards business ownership. Whether they come from trade, retail or corporate careers, most will feel overwhelmed by the opportunities in front of them. The easiest and most effective way to narrow the search is to approach purchasing a franchise business as if buying a motor vehicle.

New or second hand?

Just like motor vehicles, franchise opportunities can be new or second hand. Once a franchise business has shown a successful trading record and is returning a worthwhile profit, it will increase in value, selling on the second hand market for considerably more than its ‘new’ purchase price.

New opportunities consist of two basic types; an established franchise system expanding into new territories, or a successful business that has become a franchise system in order to take its products or services beyond a single site. Using the motor vehicle analogy, one represents established standards of after sales service and support, while the second can be an unknown quantity. However, getting in at the ground floor of a franchise system often creates opportunities for franchisees to contribute ideas about service support and to reap benefits of higher rates of return as the brand expands and grows.

But what about buying a second hand franchise? For the first time franchisee whose priority is immediate income and to perhaps only maintain the current customer base or achieve marginal growth, second hand can be the best option. Like a second hand car though, a second hand franchise needs a thorough inspection by professionals. In this case, not mechanics but an accountant, specialist franchise lawyer and a banking advisor. It also makes sense to talk to current franchisees to canvass their opinions of the franchise system and franchisor. On-selling a second hand business can, depending on how well the business has performed, also return a reasonable profit.

What make and colour?

Just like makes of cars, some brands have an excellent reputation for reliability, where others don’t. Some are superb performers, while others are considered sluggish or even out of date. Some have excellent resale value while others are slow sellers. Some cater to mainstream markets while others are a bit like two-seater sports cars and cater to a niche market.

It is also important to run the measure of personal preferences over brands. If you were to get involved, what would that brand say about you? Does it fire up your passion? Is it a brand you believe in? A good starting point for make and colour is brand websites. Websites are likely to be heavily biased, but joining a brand’s social media network such as Facebook and Twitter can turn up both positive and negative revelations from clients and customers.

Take a test drive

The next stage is to take the franchise, or franchises, that most appeal for a test drive. Where a partner or family is involved, it’s important that they be included in this process. With a new franchise system with no franchises up and running, it will be a little more difficult than with an established brand or second hand franchise. Most important of all, rose tinted glasses should be left at home. Only by doing that will a potential franchisee be able to see the good, bad and ugly side of a business opportunity.

With an established brand expanding into new territories, a potential business owner should be able to meet face to face with several franchisees and really get to understand the nature of the business. Where applicable, they should go out on the job. That way they can experience for themselves whether it may perhaps be too physical for them, possibly too repetitive for their liking or may require more selling than they would feel comfortable with.

Also, they should do their best to try and speak to customers. What do the customers think of the product or service? What do they feel about the brand in terms of what it represents to them – reliability, honesty, trustworthy, etc. Just as with a car, closer inspection could reveal a lack of care or corrosion of the customer base. Don’t be afraid to ask hard questions of the seller, and if not satisfied, get on to the franchisor for a history of ownership, trading and customer feedback. It could be that the seller’s attitude is turning customers off the brand, which can be a reason why a buy-in cost seems too good to be true.

Instruction manuals

New or second hand, all franchises must come with a comprehensive set of manuals. These are at the heart of the franchise system. They emphasise the difference between buying a stand-alone business, where even with a supportive seller, the purchaser will be pretty much left to their own devices.

Check that franchise system manuals have been prepared by professional franchise consultants and that they cover all aspects of managing and operating the business. They should also include every imaginable operational scenario. Most franchise systems today take full advantage of information technology, particularly accounting systems, stock control and communications among franchisees. This inter-franchisee communication is, in itself, a major benefit of being part of a franchise system rather than a stand-alone business.

Before buying any franchise business, time should be spent diligently and methodically going through the manuals. Whilst the franchisor will not let manuals off their premises, they will allow on-site study and scrutiny.

Private sale or dealership

It is more comforting buying a car from an established dealership. For peace of mind in franchising, it really does pay to make sure the franchisor is a member of the Franchise Association of New Zealand. To become a member, a business must demonstrate high ethical and other standards.

Pushy salespeople

Most people feel wary of pushy car sales people. A potential franchise business owner should feel the same when a franchisor or business broker attempts to rush their decision-making. A franchise is a long term commitment and needs clear headed thinking and evaluation. Any undue haste or reluctance for making full disclosures should sound warning bells. Questions not being answered satisfactorily are another reason for feeling uneasy. If not completely comfortable, the potential franchisee should walk away from that business.

To buy or not to buy

A potential franchise business owner should analyse everything carefully before signing on any dotted line. The need to take professional advice cannot be overemphasised. The potential business owner should not stop researching until they fully understand both franchising as a business system and all speci?c details of the business they are considering.

David McCulloch has been a franchisee, a franchisor and a consultant. He has worked with over 150 companies since his entry into franchising in 1983.

‘The Franchise Coach’, located in Auckland, specialises in providing corporate and medium sized enterprises with broad-spectrum support, services and mentoring necessary to advance ambition to franchise reality, as well as taking existing systems to the next level.

Contact David at: Phone: 0800 26 22 44 Email: This e-mail address is being protected from spambots. You need JavaScript enabled to view it Web: www.franchisecoach.co.nz

A GUIDE TO BUYING AND FUNDING A SUCCESSFUL FRANCHISE

By Dean Madsen, Westpac

A GUIDE TO BUYING AND FUNDING A SUCCESSFUL FRANCHISE

We’re already a nation of small business owners and entrepreneurs, so the opportunity to be your own boss and run your own business is a reality. Franchising offers a different range of options compared to those of setting up a new business or buying a going concern.

Some of the advantages to investing in a franchising business are very persuasive. With a franchise system you are buying:

• a proven product or service

• an accepted brand or trade name which gains you access to a market

• a tried, tested and documented way of doing business

• ongoing development of a product or concept

• access to training and support

• increased purchasing power for stock, advertising, recruiting, etc.

The latest economic cycle tended to be very industry specific. Retrenchments also created more people who were potentially interested in owning their own business. Many people have sizable equity or superannuation stakes to invest. This can enable people who have always had a dream to go into business for themselves to do so.

How easy is it to get finance?

Whereas a small business is usually seen as a risky investment and may not be easily financed, there has been a revolution in franchise financing. The good news is that because the strong systems and brands of the better-known franchise systems tend to considerably lower the business risk, it has enabled banks to take this into consideration.

This means that a bank with a specialist franchise unit is prepared to lend against the new business, provided the figures makes sense, based on the success of the franchise system as a whole. In practice, this means that potential franchisees would need less of their own money and can secure part of the investment against the assets and future cash flow of the business. This is a great outcome for investors.

So how do you choose which franchise to invest in?

Everyone is unique, with individual goals. The first step should be to get some good specialist advice on the various components; the industry, the appropriate franchise system and the specific franchise you wish to purchase, where factors like location become important.

A good starting point is to look at something you will enjoy and is a good match for your own interests and skills. Then consider the macro issues, like which industries are in a growth phase.

But once you have chosen a particular industry or franchise system, there are some questions to ask yourself about the franchise systems products and service:

• Is there a real need for this product/ service?

• How stable is that need?

• Is the product/service still growing as a category?

• How large is the current market and the potential market?

• How much competition is there in the category already?

• Are there several franchises to choose from?

• What do they have in common?

• How are they different? Is that important?

The most successful and profitable franchise systems tend to share a number of characteristics for example:

• ongoing development of the product or concept, which is vital for mature systems to stay competitive

• initial and ongoing training and support

• increased purchasing power, the franchise system can negotiate better pricing from all suppliers, reflecting the volume of the total system

• coordinated marketing and advertising

Financial returns

Making money is the purpose of any business. You may be better off buying a more expensive, profitable business than buying a low-cost business which offers little or no profitability, growth potential or franchise support. Before you even think about returns, you’ll have to take other things into consideration such as tax, borrowings and, of course, your working wages.

In addition to the ongoing return upon your investment, the other consideration is how much you will get for your business when you sell it. A successful franchise operation is likely to attract a considerable premium and offer a good capital gain.

Are you the right person to operate the franchise?

So the returns look good, but how do you know you have what it takes to run a successful franchise business and if the franchise is right for you? There are some key questions you need to ask, including:

• Why are you interested in working for yourself? – Do you seek independence, a change in industry, a new lifestyle, financial independence? Or is it because you see the success of other business owners?

• How comfortable are you with risk?

• What level of personal commitment are you willing to make? Are you willing to work longer hours, even weekends if necessary?

• What sort of person are you? Are you motivated, positive, enthusiastic?

• Are you a team person, or are you happier working on your own?

• In what sort of environment do you enjoy working?

• Are you happy for someone else to set the direction for the business?

• Will you receive support from those close to you?

• Will this business meet your personal goals?

• Will you be as good as you want to be and do you have what it takes, in terms of skills?

• Do you fully understand what’s involved and are you comfortable with that?

• Do you get on with the franchisor? Are they reliable and competent? Do they understand your goals and aspirations?

• Could you have a future with this business and is it one you are happy about?

• How successful have others been and can you be just as successful, or even more so?

• Do you have your own territory? How big is it? How viable is it?

It is also useful to ask other people you know the same questions about yourself. Compare their answers with your own. Ask people who are self-employed about what it’s like – the good points and the bad. Identify what these people have in common? Are their answers consistent? Would you be happy working in that sort of situation?

The most profitable franchisees in any franchise system will generally have three key factors in common; a good operator, a good location and a lower level of fixed costs (namely rent).

If you can tick these boxes and successfully answered all the aforementioned questions, you will be will on your way to buying a successful franchise. Remember, at every meeting, whether it be with the franchisor, other franchisees or business advisors (which would include a specialist franchise banker), look to gather more details than in the previous meetings and don’t be afraid to ask, ask and ask.

Dean Madsen is a Senior Franchise Manager for Westpac New Zealand, with more than a decade of experience in funding franchisees and franchise systems. Westpac offers specialist Franchise only Managers in all New Zealand’s major centres to give customers the personal and informed service they deserve.

Westpac were the ?rst bank offering a specialist franchise team in New Zealand and have been on the forefront of offering franchise-funding solutions for the largest and most recognised franchise systems.

For more information please contact: Westpac Franchise Team Phone: 0800 177 007 Web: www.westpac.co.nz

The views and opinions expressed in this article belong to the author and do not necessarily re?ect those of Westpac. The information contained in this article is intended as a guide only and is not intended as an exhaustive list of matters to be considered. Persons entering into franchise agreements should seek their own professional advice.

WEIGHING-UP OPTIONS WITH 'E'ASE

By Hannah Samuel

WEIGHING-UP OPTIONS WITH 'E'ASE

Buying a franchise can seem like a relatively easy way to get into business. You benefit from the brand awareness and processes the franchisor has in place and can get the business up and running quickly.

However, exploring which opportunities might be most appropriate for you, and provide the best ‘deal’, takes time and energy and undertaking due diligence is an essential part of deciding which brand or business you might wish to settle on.

There are any number of variables to consider, including initial purchase price, ongoing costs, the nature of the business itself, the level of autonomy you might have, marketing and promotional support and, of course, estimated cash flow and profits. The financial sustainability of the franchisor, and its reputation in supporting its franchisees, may also influence your decision in many cases.

Weigh the risks

Examining each element and carefully weighing up the likely pros and cons, will ensure you minimise the risk of buying a business that doesn’t suit you or your family or associates. However, even with the best due diligence, there are no guarantees. And whilst objective, quantifiable hard data – such as past performance within the group, or specific confirmed fees – will help in the decision-making process, ‘soft’, subjective elements – such as how you feel about the business and your ‘gut-instinct’ - will also play a part in whether you choose to invest or not.

The traditional 4Ps of marketing are worth including when reviewing your options. These include product, price, place and promotion.

Analysing whether each of these provide a good ‘fit’ for you can be a useful exercise. Do they meet your parameters in terms of what you expect from the franchisor and are you prepared to invest time, money and other resources to play your part in making the franchise successful?

Product

When considering the product, ask the right kinds of questions. Is this a growth industry, product or service? How competitive is the market? What kind of research and development does the franchisor undertake to ensure the organisation’s products and services remain relevant, attractive and in-demand?

Price

Price, for both the franchise business itself and the products and services it provides, will obviously be a huge influencer of whether the business might be for you. Are the margins appropriate? Do profit statements and projections seem realistic? How much discretion might you have over changing prices to suit local conditions from time to time?

Place

In terms of place, or location, do the franchisor’s policies minimise the likelihood of competition from other franchisees within the group? How supportive might the franchisor be in extending how clients might reach and interact with you? Will you have a range of ‘entry points’, physically or metaphorically, that make it easy for clients and customers to engage with, and buy from you?

Promotion

Will promotion be left entirely to the franchisor or will you be responsible for elements of this, and if so, do you feel skilled enough to do what may be needed? Might your cash flow be affected by ad-hoc responses to competitor promotions? How much leeway might you have to suggest promotions that might work for your client base?

All good questions to ask, but to really make sure you feel as comfortable as you can when weighing up which two or three franchises you might really want to invest in, another set of criteria is important to consider alongside the 4Ps – the 4Es: Emotion, Experience, Esteem and Ethics.

Emotion

The strength of the emotional connection to the work we do will keep us going when things get tough, or don’t go according to plan. Logic might tell us to get on board, but emotion might tell us to steer clear. Do you feel like you’ll want to still give 120 per cent when everyone around you is throwing up barriers and even you’re starting to doubt the decisions you made? Does the opportunity appeal because it strikes a chord in your heart, as well as your head, and the company, its products or services align with your values and you connect at an emotional as well as logical level? If not, it may not be right for you.

Experience

What kind of experience are you likely to have when dealing with the franchisor, and what kind of experience are you likely to provide to your clients and customers? Will you have them raving about you and returning time after time? Will the experience they get make it easy for them to put their reputation on the line and recommend you to others? Are the promises that are made, implicitly and explicitly, likely to be delivered on, from both a franchisee to consumer perspective and also a franchisee to franchisor perspective? If you have doubts about the experience you might have as a franchisee, and the experience you’re likely to deliver to customers, dig deeper until your doubts are allayed.

Esteem

Do the dealings you have had with the company you’re considering leave you feeling respected and valued or just another number in their business growth plan? Do you feel respected and treated with esteem, or does it all seem too ‘square-peg/square-hole’ process driven and your questions and concerns are dismissed without serious concern or discussion? The level of esteem you are afforded at the outset is a major indicator of how you’ll be treated once you’re on board. If the franchisor doesn’t make you feel both valued and valuable, you might ?nd it tough being heard effectively once you’re one of many within the group.

Ethics

Does the ethical framework of the company align with your personal ethics? How have they treated exits from the company in the past? Is con?dentiality maintained? Do they act with integrity and are they serious about delivering on their promises and the claims they make, both internally and externally to customers? Are fair and equitable processes used when a franchisee and franchisor don’t see eye to eye?

Clearly, answering questions thrown up by the 4Es won’t be as easy as punching numbers into a calculator and making a decision based on the ?nal number that comes up. However, they are fundamentally important to ensuring decisions you make about which franchise to invest in include both objective and subjective elements.

Ultimately, if two or three possible options rate very evenly based on number-crunching and logical information, using the 4Es of emotion, experience, esteem and ethics to identify which franchise has the edge in these areas, makes good business sense. Not only do the 4Es give you a greater range of criteria to assess opportunities against, they help make it ‘E’asier to feel good about the choice you ?nally make.

Look beyond price as a primary determining factor and make it ‘E’asy on yourself to make an informed and carefully considered decision.

An award-winning speaker, columnist and author, Hannah Samuel speaks, writes and mentors worldwide on issues around reputation, trust and integrity. Hannah is the founder of online reputation service directory, TRUSTcite.

For more information please contact: Hannah Samuel Web: www.hannahsamuel.com.

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