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buying a franchise: financial matters

banking on HOSPITALITY

1. Concept Is the franchise growing and is it on-trend? Crosscheck against average store sales and margins for the sector. It can be easier to grow a well-performing franchise within a growth sector.

René Artz

Does the franchise provide regular benchmark monitoring? This may include comparisons of store financial performance and regular mapping of the guest journey for a consistent customer experience. Both are key to doing well in hospitality.

René Artz from Westpac looks at challenges and opportunities in the hospitality industry

Great hospitality businesses focus on getting accurate data from point of sale, purchase orders and stock takes to enable regular monitoring of profit after controllable or prime costs. In business, a broad score is income and expenses, with the difference between them relying on your ability to control them for maximum profit.


A key point here is that 90 percent of controllable costs will usually lie in just three areas: food; beverage; and payroll.

Making it work

Rules of thumb suggest that quick service restaurants should keep prime costs within 60 percent of sales, and full-service restaurants within 65 percent of sales. Why? Because non-controllable costs from rent to franchise fees, merchant to utilities can take 25–30 percent of sales. Combined, a hospitality going concern may swallow up 90 cents for every dollar of sales before finance costs or shareholder return are allowed for.

f you love food and drink, or the operational adrenaline and atmosphere of a busy café or restaurant, a hospitality business may appeal. But statistics show that equal numbers enter and exit the hospitality industry every year, so you shouldn’t just follow a dream blindly. This is where buying into a well-developed franchise system can be a good idea – you’ll have a proven brand and business model behind you, detailed operating procedures and systems to follow, and benchmarks and KPIs to help you measure and improve your performance. In a competitive industry, all these advantages add up.

Whether buying an existing franchise or starting new, there are plenty of things to consider. Financially, there are three key pillars 1. Concept 2. Location 3. Capitalisation All three require you to conduct proper due diligence prior to committing yourself. Due diligence is like getting a pre-purchase inspection on a house or car, but rather more complicated.

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Failure to monitor and control these prime costs can lead an otherwise busy, well-located hospitality business to close. A bustling café operating with insufficient margin will go out of business just as quickly as a café with few customers. So how should we view prime costs? While food, beverage and payroll are benchmarked and reviewed individually against the franchise yardsticks, monitoring the combined controllable costs against sales is a key to making hospitality work.

Example To see why prime costs are pivotal, let’s look at how a 5 percent reduction in prime costs would impact upon a café or restaurant owner. They might achieve this through matching staff levels to a forward calendar of events,

Buying, selling or setting up a franchise? Talk to Alistair at CHD-Law

Alistair's legal advice is centred around franchising and his knowledge and experience are wide-ranging. He has presented at the Franchise Association of New Zealand's conference and is an author of the franchising materials for a market leader in a nationwide legal resource for lawyers.


09 308 8071 alistair@chdlaw.co.nz www.chdlaw.co.nz Friendly - you can be sure of a warm welcome when you arrive at the offices of Churton, Hart & Divers 32 Westpac 32.indd 1

Franchise New Zealand

Autumn 2019

Year 28 Issue 01

22/03/19 9:21 AM

Profile for Franchise New Zealand

Franchise New Zealand - Year 28 Issue 01 – Autumn 2019  

No matter whether you were born In New Zealand or arrived in the country more recently, buying a business is a big decision. Working out wha...

Franchise New Zealand - Year 28 Issue 01 – Autumn 2019  

No matter whether you were born In New Zealand or arrived in the country more recently, buying a business is a big decision. Working out wha...

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