By Chris Ryan F. Fin.

So……… you want to buy a franchise? Why?

You may have many reasons, but let me suggest that your primary motivation for buying a franchise should be a desire to make money. Or more specifically, to make an adequate profit sufficient to fund your life’s expenses. This could be -:

1. putting food on the table for your family,
2. providing a roof over their heads,
3. paying your mortgage,
4. funding your household costs like rates, electricity, motor vehicle & more,
5. providing welfare and education for your family and
6. financing your sport and recreation needs.

To start off, you need to identify a business that can accomplish all the above, and just as importantly -:

1. fund the costs of running the business,
2. service any borrowings necessary to purchase the business, and
3. provide sufficient return on the cost of the investment (ROI) to justify your purchase of the business.

What If You Get It Wrong

Before you buy a business on finance, you need to have an honest understanding of your household costs to keep the home fires burning.

Why? Get them wrong and you face these alternatives -:

• Starvation… result: your business fails because you starved to death.
• Family starves… result: Before starving, they kill you because you are a poor provider.
• Have to sell the family home… result: family leaves, you get depressed and you might as well have had the family kill you.
• Can’t pay the school fees, ballet lessons, etc. … result: again, death is lookin’ good.

The most probable alternative however is:

You will be reluctant to withhold funds from your family or yourself. Therefore, you will starve your business of working capital & stock. As this position gets worse, opportunities reduce and your business fails.

Result: You will have lost a lot of money as you were required to sell the business for much less than the purchase cost. Or worst of all, you don’t have a business to sell.

So two things -:

1. Get the household expenses right, and
2. Understand the issues of financing the business, such as -:
1. Fees,
2. Interest Rates,
3. Security,
4. Term of Borrowing,
5. Profit Projection and
6. Working Capital.

This concludes part one. Some of these issues will be discussed next week in my article series on financing a franchise – so stay tuned!

Chris Ryan F. Fin.
ryanmortgage1@optusnet.com.au

Chris Ryan is a Finance Broker specialising in Commercial Lending. He is a Director of Ryan Mortgage & Finance Pty Ltd and is a Fellow of the Financial Services Institute of Australia. Chris Ryan has 33 years experience in the Banking Industry principally engaged as a commercial lender and has operated his own Finance Broking practice for 10 years.

If you had subscribed to my newsletter on the right, you’d have just gotten my free guide on “How to Maximise the Value of Your RetailBusiness”. Below is an excerpt on a controversial topic – skimming off the till.

5. Be Truthful

This is not a mini-guide on morals, but the fact is… being truthful usually means more profit and less frustration in the long run. What do I mean?

Take skimming off the till as an example. This is the practice of taking cash out of the cash register (i.e. not declaring all income on the tax return), which means less tax needs to be paid. And for most owners, it sounds good because they save money. But aside from being highly illegal, till skimming also affects the sale price dramatically.

How? As a simple example, let’s say you take $1,000 out of the cash register each week without declaring it. This equates to $52,000 a year. Taking it out of your BAS statements, you save about $4,727 in GST payments (= $52,000 divided by 11). That leaves $47,273 in post-GST income.

If you pay a flat company tax rate of 30%, you save $14,182 by not declaring it (= $47,273 times 0.3). So in total, you save $18,909 in taxes (= $14,182 + $4,727). Pretty good, huh?

Now let’s look at when you sell your business. Assuming the current earnings multiple for your industry is about 1.5x, your business could’ve been worth $78,000 more if that income had been declared (= $52,000 times 1.5).

So what’s the result? If you take the cash now, you’d be making a net loss of about $60,000 when you sell your business! Ouch!

If you enjoyed reading it, subscribe to the newsletter (on the right) for the full guide.

Chris Khoo
Business Broker

Credit: Cash register image by thiagofest

If only you had subscribed to my newsletter (to the right), you’d have just gotten my first preview mini-guide on “How to Maximise the Value of Your Retail/Food Business”.

So if you don’t want to miss out on members-only content, join the newsletter now.

I promise I’ll deliver great information, and you can unsubscribe anytime.

Chris Khoo
Business Broker

This is Marshall here from Small Business Internet Marketing. Chris has kindly asked me if I would do a guest post for his blog – so here it is. So, you have your business for sale or you are thinking of selling. You want to maximise how much you can sell it for. Here is one area that is often overlooked, but is essential to getting the best price.

Most business owners equate an Internet strategy with having a website. Well, that is good – but really is only scratching the surface. We find, by and large, that most businesses have a website because they think they should have one (which is definitely the case). However, when we ask the question:

“Are you happy with how the website is going?”

We get 3 types of answers:

1. Yes, it is great. It looks fantastic and all my friends and customers think it looks great as well.
2. Yes, I think we have at least broken even on it.
3. No, I get no sales from it and it cost a fortune.

Let’s look at these answers in a bit of detail:

1. Yes, it is great. It looks fantastic and all my friends and customers think it looks great as well. This is actually irrelevant generally. A primary purpose of a website is to get new customers to find you and to do something with you (generally buy, but maybe subscribe to a newsletter, or similar). This is a sure sign that no SEO or strategy has been done and it is there to stroke the owner’s ego. Your friends and current customers know the website is there, you want potential buyers who don’t know you to find you and buy.
2. Yes, I think we have at least broken even on it. Has no idea how it is really going. Has no tracking package set up on the site (as Google Analytics is free, everyone should have at least this). More importantly, they have no process by which to track conversions, so have no idea if the site is working or not.
3. No, I get no sales from it and it cost a fortune. Had no Internet strategy and have applied the time honoured principle of “Build it and they shall come”. Unfortunately, the Internet just does not work like this. So they drop a lot of money and see no results (well at least these business owners want results and just not a good looking website).This is by far the most common area that we do work in at Small Business Internet Marketing.

How do you fix it?

So what do you need to add value to your business via your website? Well here are a few pointers:

1. Own your domain. If your business is Bob’s Smash Repairs, have the domain www.bobssmashrepairs.com.au registered by business – even if you don’t have a website. Domain name poaching and reselling is big business.
2. Have a clear strategy why you have a website – this is to sell it to any potential purchaser of your business. Internet strategies generally only have upside if properly structured, and upside potential is what gets a 3 times earnings multiple rather than 2 times earnings multiple when you sell your business.
3. Have clear and followed business processes and rules around your website – don’t let emails for enquiries go to an unattended email address because someone is away on holidays.
4. Have a tracking package loaded so you can tell a potential purchaser exactly how many hits you get a month, how long they spend on site, what pages they visit, what are the main keywords, etc.
5. Have your web based sales and conversion metrics at your fingertips. We did $X of sales via the web last month – a conversion rate of Y%.

So the answer to the question I posed in the title is double-sided. A robust Internet strategy with proven performance can certainly add value to your business, but a poorly thought out strategy (or none) can actually decrease your business value when you have your business for sale.

If you want to know more about internet strategies, have a look at our site www.smallbusinessinternetmarketing.com.au.

I have to admit, when I first heard this term, I had a picture of a redback spider in my head. Needless to say, I wasn’t too fond of the word at first.

But once I got my head around it, boy did it open my eyes. It’s an essential part of understanding the true profitability of a business.

… so what is an addback?

An addback is an unusual or non-business expense that is taken out of the profit & loss statement. This lifts up the business’ net profit to its true operational profitability for prospective business buyers.

But should we be fudging the financial statements?

As part of an accountant’s job to help businesses minimise their taxes, they can apply expenses like interest on a business loan to their business. This reduces the net profit of the business, which in turn reduces the tax the owner has to pay on their income.

Another example is depreciation. Like the above, depreciation can be claimed as an expense, which reduces the net profit of the business (and thus the tax the owner has to pay).

So what’s the significance? Depreciation and interest on a business loan do not affect the actual running of the business, and so shouldn’t be used to determine the true profitability of the business.

OK, so why is it called an ADDback? Isn’t it about taking out expenses?

OK, this part gets a little into accounting-speak, so if you don’t understand what I mean, let me know below and I’ll explain.

This is what a typical P&L (profit & loss statement) looks like.

Sales	$a
– COGS	$b
Gross Profit ($a – $b) =	$c
– Expenses	$d
Net Profit ($c – $d) =	$e

Now, that’s all fine and good, but when you want to lift the profitability of a business to its maintainable net profit (i.e. with addbacks included), you include what’s called an addback schedule.

The addback schedule contains a list of addbacks to ADD back onto the net profit. What it essentially does is reverse those expense items so you get a better appreciation of the maintainable net profit of the business.

So it looks like this now:

Sales	$a
– COGS	$b
Gross Profit ($a – $b) =	$c
– Expenses	$d
Net Profit ($c – $d) =	$e
+ Addbacks	$f
Maintainable Net Profit ($e + $f) =	$g

Hope that explains it. If you don’t get it, leave a comment below and I’ll get back to you.

Otherwise, if you have any other questions about buying or selling a business, please let me know in the comments.

Chris Khoo
Business Broker