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.

a. Fees

Banks will charge approval fees. This may vary between 0.6% to 1.2% of the sum borrowed. The primary commercial finance lenders will be the four majors (ANZ, CBA, NAB and WBC).

b. Interest Rates

In some cases, purchasers may have sufficient equity in residential land or home to be able to borrow for a business purchase on home loan rates. However, it is a monetary regulator directive for banks to seek commercial borrowing rates. This could be 2.0% to 4.0% above residential borrowing rates.

So the better prepared you are with your business plan and security options, the better result you may achieve. Franchises often benefit from interest rate concessions due to the relationship between the lender and the proven successful history of the franchise operation.

c. Security

You may have already considered the problem – “Will the equity in my home be enough to provide the bank with the necessary security?”

Whilst banks recognise the business you intend to purchase “has value”, the difficulty you face is convincing the lender to utilise that value towards the security needs of the borrowing proposal.

In some instances this may be possible but generally this is only with recognised commercial lenders. Again, franchise businesses provide the purchaser with an advantage.

With a “Franchise Business”, a lender may have a “Franchise Policy” which recognises the business as having a capacity to provide a percentage of the purchase price towards securing the borrowing need. This percentage may range from 40% to 70% depending on the franchise and the lending bank.

d. Term of Borrowing

Normally, the business will occupy leased premises. And in the case of a franchise, the head franchisor will have secured the lease for the franchise group and you will be offered a sub-lease. An important issue to remember is that the term of your borrowing could be linked directly to the remaining term of the lease.

This issue applies to both stand-alone businesses and franchises, albeit this is often relaxed with franchises. This is because landlords will generally favour a franchisor over a stand-alone operator.

There are sound reasons for this including -:

• The business may be reliant on the site of the premises to access the desired market segment. In the event the business lease expires and renewal is not available, the business may need to close and re-establish elsewhere. Cost of re-establishment on top of servicing remnant loan payments may create overwhelming strains on profitability and working capital.
• No suitable site may be available necessitating winding-up of the business, and with a remaining debt still to be serviced there will be no income stream to provide such servicing.
• You may be seen as a captive tenant at the expiration of the lease and the renewal terms offered bear no relationship to the expiring lease thus placing extreme stress on what was originally seen as a viable operation.

The moral of the story is to establish as many of the terms (rules of the game) for the period you will have a borrowing commitment.

e. Profit Projection

As discussed, this is a very important section of the business purchase. This is based on the vendor’s historical data extrapolated to take out his costs and include your costs.

The Banker will need to see:

1. your assessment of expected profitability,
2. how it will service your existing debt obligations, as well as
3. those obligations you would propose to take on as a result of the business purchase.

Also, don’t forget those home-based costs we discussed earlier.

And in addition, the banker will also need to see that there is a reasonable margin in the profit to allow for negative movement in the economy.

With regard to financial data, franchise businesses have some advantage over stand-alone businesses in that they have financial systems in place to ensure ratios such as cost of goods, rental, etc. are being achieved in accordance with other franchise members’ ratios.

This will provide an expectation upon franchise members to maintain a level of record keeping sufficient to enable access to bank borrowings. And not only that, you ensure for yourself that you can promote the business correctly for sale at a later date, if and when you decide to move on.

f. Working Capital

Working capital adequacy can only be tested by one means – by compilation of a Cash Flow Forecast. This is usually completed in conjunction with the Profit Projection (note: they are both very different from each other).

Whilst the Profit Projection is “Tax and Cost-In” based, the Cash Flow Forecast is “Time and Cost” based. To clarify this a bit, Interest costs go in as an expense on the Profit and Loss, whilst Principal plus Interest payments go to the Cash Flow Forecast.

And Finally…

If you’re not confident in compiling the data described above, I suggest you utilise the services of a professional Commercial Finance Broker or the services of your Accountant. In many cases, you’ll only have one chance to get it right.

And remember the rule, “Those who act as a solicitor for themselves have a fool for a client.” … so keep your solicitor, and for that matter your accountant as friends.

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.

They say information is power – well, here are a few business benchmarking resources and my associated notes.

ValueCruncher – EBIT Margins

Look at the end of the PDF for the table of indicative EBIT margins for various types of businesses.

Note: I don’t know the source of these figures, but they seem pretty reasonable to me.

ATO Small Business Benchmarks

For Australian businesses, this is really good information, but the only problem I have with it are the wage figures.  If you look at the terminology section, it says:

“labour costs, we mean salary and wage payments, including contractor payments and wage payments of sole traders or partnerships (excluding payments to associated parties).”

Since owners and their accountants adjust wages to maximise their tax advantages (and in very significant ways I might add), I don’t see how those figures can ever be considered usable at all for SMEs.  So I would tend to disregard it.

RetailSmart Specialty Stock Turns

A small list of stock turns for specialty stores like butchers, fashion shops, hardware, etc.

If you know of other business benchmarking resources online, I’d appreciate you contributing in the comments below.

For most people, the idea of starting a business can both be exciting and scary at the same time.

The exciting part first:

• You take control of your financial destiny, meaning that your income isn’t fixed by your employer and you control it based on how well you perform in the bsuiness.
• You have flexibility over your time, meaning you can pick up from the kids from school and take them to soccer games, etc.
• You do what you enjoy.

OK, now for the scary part:

• If you’re looking to start a retail business, you usually have to take out a lease for a few years, which means you’re committed to pay the rent over that time.
• Depending on your level of business experience, you have no idea whether your business will work or not.
• Unless you’re very good at marketing, your business will be generating low income while you’re building up a customer base.

If you’re wanting to start a business, you can deflect most of the scary points above with this positive affirmation.

“I’m a capable individual. I can do it. I can make it.”

This is what many highly paid motivational thinkers would like you to think. Unfortunately, reassuring yourself does not assure that the rest of the world wants you to succeed. In fact, there are many competitors who would rather your business keel over and die!

This is where I like to quote one of my favourite theories from Robert Ringer, best-selling author of “To Be or Not To Be Intimidated”. In it, he suggests the “Theory of Reality”.

Reality is neither the way you wish things to be
nor the way they appear to be, but the way they actually are.
Either you acknowledge reality and use it to your benefit,
or it will automatically work against you.

Unfortunately, many new entrepreneurs don’t consider the reality of “starting a business”. It may sound fun and exciting to the individual, but in reality, many businesses are closing down every day because the owners cannot compete. If something looks easy to you, it’s generally because someone else put in alot of effort behind the scenes.

But I’m Still Interested In Having My Own Business Someday

OK, let me suggest buying a business as a solution.  It does alleviate most of the scary points above, such as showing an established track record of profit as well as making money from the day you take over the business.

However, it does present a set of challenges, and due diligence is one of them.  Due diligence is the process of verifying that the business is in a position to trade legally once you take it over, and that the reported facts and figures about the business are correct. I won’t go into detail about it in this post, but maybe in the future.

If you’re interested in buying a business but unsure of what to buy and the process of going about it, let me know and we can sit down and have a chat sometime.

By Kym Krey

Even if the thought of selling your salon has not crossed your mind yet, one day it might. The steps you take to make it ready for sale will make your salon much more valuable to keep, so the effort is always worth it.

However, most salon owners leave this far too late. In fact, most advisors will tell you that you should be preparing for the day you sell from the moment you actually start your business! Begin with the end in mind.

It can take several years to put the necessary steps in place to attract a great price and this is the very reason so many salon owners are disappointed, if not devastated, when they leave it to the last minute. They have a dollar figure in mind and when they find out what it’s really worth, they get a very rude shock. They either hang on to the salon far longer than they wanted, or sell for much less than they expected.

The trick is to look at your salon from a buyer’s perspective.

When it comes to buying a salon, there is one general rule:

1. You either pay big bucks for one that’s already built; (all the hard work is done – you’ve paid for someone else to build it for you), or
2. you pay a smaller amount for a less successful business (or start from scratch) and have to do the hard yards yourself.

The more attractive your salon is to a buyer, the more they are likely to pay for it.

What makes a salon attractive to a buyer?

The factor that will mostly influence your sale price is gross profit. Even if your salon looks great, has a great reputation and seems busy, if it’s not making money, a buyer won’t pay big dollars for it. Without a healthy profit, you are relying on selling your shop-fit. Remember, clients are fickle; if they’re not comfortable with the sale of the salon or a new owner coming in, they can leave in droves and crush your turnover. Your buyers are very aware of this. They’re looking for a guarantee of income.

A general rule of thumb when valuing a salon is between 1-3 times its gross profit. What determines whether it’s closer to 1 or to 3 times is what else is included in the sale:

• Cost and quality of the fit-out. If it’s beautifully presented, modern, computerized, in a great location etc., it will command a higher price. If the fit-out is in need of repair or refurbishment, the buyer needs to spend money and usually wants to pay less to allow for this.
• Does it rely on YOU (and therefore your buyer) working constantly in the salon to be profitable or does it run smoothly without you? Do you have written policies, procedures and systems which your staff are completely familiar with? This is so if you were not there, the salon would continue to run well and maintain quality and turnover. How well trained are your team? Will it all fall over without YOU?
• Is there a manager or competent person to run the salon if the buyer chooses not to work in it? This is more attractive to an investor or non-hairdressing buyer.
• The size and accuracy of your database. Do you have the full contact details of your clients on a database & are they up to date? A new owner needs to market strongly to secure as many of your clients as possible, and with no database, your salon becomes more of a risk and therefore, less valuable. Your database is GOLD.

Buyers willing to pay higher amounts generally require a salon where all the structure is in place & the hard work is done. They’ll value your business skills & acumen.

What should I focus on?

• Gross profit – increase turnover and manage costs well.
• Does your fit-out need an update?
• Is your database up to date and accurate?
• Are your systems in place and monitored constantly?
• Are each of your staff well skilled, productive and working well under management?
• Do you need to get an independent valuation of your salon to show the current market value, so you know what to expect? Then you’ll know what you need to do to get the price you want.

Kym Krey is a salon business coach, supporting salon owners to develop real business skills and highly profitable salons. She is available for individual coaching and can be contacted on 0403 042 312; kym@yourcoach.net.au or at www.yourcoach.net.au or www.kymkrey.com.au.

About Kym Krey

Kym is a dynamic and passionate person with a wealth of business and management experience spanning over 24 years.

She has been involved in all facets of salon business management from individual salons to large multi-site operations and franchising; with a particular emphasis on building strong team culture and developing leadership.

She is an excellent business educator with a ‘knack’ for making the complicated sound simple.

She has held national roles with responsibility for over 60 outlets, educating franchisees and managers in effective business practice, financial management, goal setting and achievement and coaching their staff to peak performance.

Her systems have consistently achieved significant increases in not only areas of profitability but also in developing team spirit and accountability, building healthy business relationships and honest, effective communication.

She regularly presents workshops to guide managers and business owners through the often ‘sticky’ areas of managing team behaviour, setting boundaries and approaching those ‘difficult’ but critical conversations, inspiring them to reach beyond current perceived restrictions and achieve goals and results which were never previously possible.

A particular favourite of hers is working with young, emerging managers, assisting, developing and empowering them to become tomorrow’s leaders.

Kym is passionate about all aspects of business management and enjoys sharing her energy and enthusiasm for excellence. She was the winner of both the 2002 Australian Micro Business Awards; Qld /NT; ‘Woman in Business’ and ‘Established Businesses’ categories as well as an ABIA finalist. She is the current NSAA 2008 “Speaker Idol” winner 2008-Qld.

She is a vibrant coach, trainer and presenter with an infectious style that really gets the message across whether in one on one coaching or group training sessions.

Kym is available for business coaching and team strategy sessions, document creation, training, workshops and presentations.

Helping you build your dream business …… TODAY!

kym@yourcoach.net.au

www.yourcoach.net.au

0403 042 312

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

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.