When looking to buy a Franchise, I bought the first opportunity that came along. I was excited about the brand and bought into the sales rhetoric that there were many others looking to buy this opportunity so I had to make my decision quickly. If I had my time again, I would not be in such a hurry. What is most important is that you are buying into a profitable opportunity. Once you have signed that franchise agreement you are in for the term of the agreement and/or the length of the lease.
What I have learned is that there is always another opportunity around the corner. One that may be more profitable, so it makes sense that you take your time to get the right opportunity. Buying a franchise should be more like buying a car. Shop around, find the best price, do your research and then buy.
Here are three steps that will help to analyse a franchise opportunity:
1. Analyse the real cost of your franchise purchase
When buying a franchise the actual purchase price is more than the advertised price. You have to include things such as a franchise fee, a rental guarantee, security deposits for utilities and bank set up fees. You may have to make upfront payments for insurance, three months rent and licences to operate. There are lawyers and accountants fees to consider together with training costs and this is all before you open your doors. I would also set aside enough money to cover your personal expenses for at least the first six months of operation of your business as your business may not be profitable from day one.
2. Determine the breakeven and prepare a set of operational budgets
The very first thing you should do in analysing the business case on offer to you is determine the breakeven figure. Then you will know right from the beginning the minimum sales you have to achieve before you start to make a profit. Once you know the breakeven, break it down even further so that you know how many units you will have to sell in a day before you start to see any kind of profit. Then ask yourself, is it possible to sell this many units per day? If you have any doubts then this is not the opportunity for you. On the other hand, if you think the breakeven is achievable then you need to start preparing some budgets.
If you are buying an existing business preparing a budget will be easier as you have previous sales reports to go by. But if you happen to be buying a new opportunity (also called a greenfield site), there will be no sales data to work with. You will have to use the sales data of similar stores in the brand you are buying into as a guide to forecast your possible sales range. Either way, I suggest you prepare at least three budgets; one with a high sales range, another with a medium sales range and finally one with a low sales forecast. You have to look at all scenarios to make an informed decision to buy. Most people who are disappointed with their franchise prepared their budgets with only the highest possible sales range; twelve months later they are regretting their purchase because there is not the profitability that they expected.
Once you arrive at a possible profit figure, calculate how long it will take to repay the purchase price. For example; if you pay $250k to buy in and you are only making a $50k profit per year then it will take 5 years before you pay for the initial shop-fit and equipment. Is your lease long enough to cover the purchase? You do not want to be in the situation where the lease ends, the landlord does not renew your lease therefore you have to de-fit your store before you have even paid for it.
3. Negotiate, negotiate, negotiate
It is a little known fact that at times franchisors and landlords are prepared to negotiate to get the deal. Once you become a franchisee you are a source of income to both the Franchisor and Landlord in the form of royalties and rent for the term of the franchise agreement or lease. Use this as a bargaining tool to be sure that you are going to be profitable throughout this time. Ask for possible fitout contributions or perhaps a royalty/rent free period to help get you started. If you are going to be committed for this definite period of time, then you need to be sure you are making money the whole time. You do not have the luxury of taking two years to become profitable when your lease is only for five years. It is no fun when everyone else is making money from your business and there is no money left for you.
Becoming a franchisee is rewarding and can be a great way to build your asset base but to ensure success you have to start with the right opportunity.
To learn more about becoming a franchisee, do our free Franchisee Pre-entry Program kindly supported by the ACCC.