$79,120 – in addition to whatever rate of return on investment he and his accountant have decided is acceptable. Of course, there are other possible options if Arthur is willing to consider them. He could sell his house and invest the lot in a business, or he could rent his house out and go to live somewhere cheaper. Either of these would make a significant change in his financial situation, although they are potentially high risk, high return strategies – and would require total commitment to the new business not just from Arthur but from his family, too. Again, good financial advice will help re-work the figures accordingly. Whatever Arthur decides, he is now in a position to consider franchises that suit his financial situation. Of course, it’s important that he also chooses something that he will enjoy and which will provide the training, support and market positioning that will help his business succeed (see the list of 250 Questions to ask Franchisors at www.franchise.co.nz/ article/77). The next stage is to start getting financial information from his chosen franchises. Understandably, franchisors will want to know that a prospective franchisee is serious before they start parting with detailed financial information about their business model. They will therefore want to know that Arthur is a suitable candidate and in a position to fund the franchise, so they’ll need to see the above information first. They will also probably want Arthur to sign a confidentiality agreement ensuring that he will only show any figures to his professional advisors. Something to be aware of is that any figures provided are only forecasts based upon the franchisor’s model and experience in other locations. Although an experienced franchisor should have a good knowledge of the real costs of running the business, they can’t know for sure what level of sales will be achieved in any area before that business opens.
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The figures provided will not therefore make representations, warranties or guarantees of performance, so they are only a starting point for further analysis. As a potential franchisee, it’s up to you to determine the assumptions on which the forecasts are based before placing any reliance on them. This reinforces how critical it is to seek independent assessment of the numbers from a franchise-experienced accountant who has benchmarking data based on like-for-like business performance. Of course, if Arthur looks at buying an existing franchised business, there will be specific data available for analysis (see Understanding the Numbers at www.franchise.co.nz/article/36). However, care must still be taken to ensure that the figures provided by an outgoing franchisee are realistic and accurate.
three simple steps If, like Arthur, you want to get into a business of your own and are starting to think about what you could afford, following these simple steps will help you be realistic right from the start. 1. Work out your own financial position as accurately and as honestly as you can. 2. Establish the income that you require from the business to meet your current commitments, and add a reasonable return on your investment. 3. Carefully consider the projections for the potential opportunity. In the next issue, I will look at the sort of information that Arthur might receive about a franchise, and how he and his accountant might test the assumptions made and look at the impact different performance figures might have on the prospective business. Remember, you don’t have to do all this on your own – in fact, you shouldn’t try to do it all on your own. Seek the advice of a specialist franchise-experienced accountant to help you evaluate the opportunity, review the projections and provide you with an independent opinion. about the author Although every successful Philip Morrison is principal franchisee will tell you that of Franchise Accountants, they are passionate about an award-winning specialist their business, profit counts accounting practice which has more than passion when worked with franchisees of over 200 different franchise brands you’re still considering which throughout New Zealand. franchise to buy. franchise.co.nz – PUTTING PEOPLE IN BUSINESS for a FREE PRINT COPY go to www.franchise.co.nz/free_issue
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