Guide To Buying A Franchise – What You Need To Know: Part 2

In Part 2 of our “buying a franchise” blog series, we’ll cover more about what numbers to crunch when challenging a franchisor’s business plan and financials to make sure you’re selecting and entering into a business with a robust profit model.

Go beyond knowing how much money you require to start a franchise business, and understand the costs needed to successfully stay in business.

Look for a good business profit model

All successful businesses foundations are created on sound principals, a healthy business model that has realistic profit projections. The healthier and more realistic the profit model is the easier it is to start up, maintain, grow and more importantly exit when the time is right.

Businesses with strong brand names that are easy to recall and reputations to match, tend to have stronger financial models. This is because customers are prepared to pay a higher price, and will more often say yes, to receive a trusted service from an easily recognised brand.

Seek out a franchise with a unique offer and solid support strategy in place to help you when you need it.

Make sure the numbers add up

What is the level of investment and what do you get for it - is it good value?

How long will it take you to recover your investment - in other words what is the payback period - how quickly will the franchise you are looking at realistically and reliably turn a profit?

This is a crucial indicator, and one which you must understand and be assured that it is acceptable and achievable before you buy any franchise. If you spend $100,000 on a franchise you need to make sure at some point your get this money back either as a profit margin after you pay your wages or on the exit when you sell the business.

What are the ongoing costs of the franchise?

There are a number of expenses required for the successful maintaining of the business as well as for being a part of the franchise system.

Ongoing costs can vary widely depending on the franchisor and the industry the business is in. It is commonly based upon a percentage of the ‘gross revenue’ or sales of the franchisee.

Basically, the more the franchisor does, the higher the fee!

Here’s what you need to know:

• How much the royalty fees and advertising fees are?
• How often do they have to be paid?
• Is it a percentage or fixed amount?
• If a percentage, what is it based on?
• Is the same advertising fee paid throughout the network?
• What marketing/promotional benefits do you get for your money?
• How does it compare to other franchise systems?

Other on-going costs you need to be on top of include; vehicle lease repayments, plant and tools, your wages, other staff wages and even technology-management/administration software etc.

What are the variable costs of running your franchise such as fuel, marketing, supplies, training, etc?

How much working capital will you need before you start seeing a profit?

All new businesses take time to gain momentum, so you’ll need to budget an amount of money to get you through the start-up period which could be as long as 3 – 6 months depending on the nature of your franchise.

The right franchise will have a proven business model and will give your entry into owning a business jump start rather than taking the risk of starting and setting up a business from scratch which has higher risks and unlike being a sole trader the franchise system should provide you with help and support.

The most successful franchise brands have a much lower failure rate than completely new businesses, but you will still need to work hard to create your customer base and establish your business.

Some franchises offer better support than others who merely lend you their name, what ever you decide make sure you find something that you are passionate about and will enjoy waking up to.

If you want more help or support, talk to the experts at Budget One where our start up success programme looks at all the fatal flaws and growth opportunities of all franchises, and we work with you to lower the risk and find the right business model that meets your desired result. Call us today on +61 3 9583 7925.

 
Author, Taso Tounis