Franchise New Zealand - Year 30 Issue 01 – Autumn 2021

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Buying A Franchise

WHY BUY NEW?

have a lot of support from the franchisor to help you achieve it. Listen to that advice, put it into practice and growth will follow.

3. Capital gain Let’s look at goodwill again from the opposite direction. When you start a new business, not only are you paying nothing for goodwill but, as you build your reputation and client base, you are developing goodwill of your own. When the time comes to sell, that increases the value of your business and the price you can get for it. In many cases, the capital gain you achieve on buying a business, building it and selling it for a much higher price, will be effectively tax free. It’s much harder to make a similar level of capital gain on an existing business.

4. Area If you’re looking for an existing business within a franchise, your choice will be limited to those which are currently for sale. This means you may need to look at moving to a new area, or face a long commute, to get the business you want.

12 good reasons why buying a new franchise can make more sense than buying an existing one

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hen you look at buying a franchised business, you’ll often have two options – buying a brand-new location that you’ll need to set up from scratch, or taking over an established business that has been run by an existing franchisee or under company management. An existing outlet might seem tempting. It will have an established customer base, positive cashflow and, if it employs staff, trained people in place who can help as you get to grips with the challenge of running your own business. Buying a new franchise – what some franchisors call a ‘greenfields’ location – can offer a lot of benefits as well. Here are 12 key points to consider before you make your decision.

1. Price In most cases, a new franchise will cost less than an established one, because you will not be paying a premium for ‘goodwill’. Goodwill is the reputation that a business has built up – the factor that has customers coming through the door and results in proven sales performance. If a business is profitable, you can expect to pay a significant amount for goodwill over and above the value of the business’s equipment, fit-out and other assets – and established businesses are in short supply at the moment, driving prices up (see page 16). A new business may not have those sales yet, but something to bear in mind is that a franchise with a well-known brand will already have goodwill in a brand-new location even before it opens its doors. That’s why you get queues outside a new McDonald’s, or why companies like Aramex or Jim’s Test & Tag can provide new franchisees with work from their very first day.

2. Potential It’s said that when a new franchisee takes over an existing business, the turnover goes up – or down. One thing it rarely does is stay the same. The risk is that when you buy an existing business, it may already have got as good as it’s going to get. The seller might tell you about all the potential it has, but if it’s so easy to grow, why haven’t they already done it? Unless you’re buying a business that has been poorly-managed and are confident that you have the skills, energy and ability to turn it round, growth isn’t always easy. When you buy a franchise unit in a new location, you may start with a turnover of zero but you have massive potential. Benchmarking should enable you to see what is realistic in any particular location and you’ll

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If you’re prepared to do that, fine – but opening a new franchise might allow you to be exactly where you want to be with far less disruption to your home life. Starting a new business is a time when you need all the family support you can get, so keeping things simple may be a better option.

5. Location New shopping areas and housing developments are springing up all the time. If you want to take advantage of these new markets, you have no choice but to open a new business to service them – and a franchise offers many advantages. Franchisors will usually have done their homework on where and when a new unit will become viable, have the contacts to acquire the best locations and the negotiating power to do the best deals. Where retail premises are required, landlords will come to franchises first looking for established brands to provide pulling power and marketing muscle – the muscle that will bring you customers from day one. And a new business will come with a full-term lease, meaning you can arrange funding over a longer period. You can also negotiate things like the rental bond, lease terms and fit-out contributions to suit you, whereas with an existing business you can inherit some less-than-favourable terms or escalation clauses (see page 48).

6. New fit-out Franchisors – and landlords, too – know the value of keeping an outlet looking bright and fresh. Most will require a revamp every three to five years, and this is unlikely to be cheap. When you buy a new franchise unit, you have all that time to build your business before a re-vamp becomes necessary. If you buy an existing unit, you’re likely to have less time, and if you’ve stretched your budget or borrowing to the limit to buy into the business in the first place, that could give you problems.

7. New equipment Much the same applies to the equipment you need to operate your business, whether fixed or mobile. With a new franchise, you’ll be provided with the latest equipment chosen by the franchisor to be appropriate to the business you are operating. It will come with training, support and guarantees, and may even be able to be financed via an equipment lease, using up less of your precious capital. Buying an existing business means buying used equipment. It may not be current standard, you don’t know how it has been maintained and, if it proves unreliable, there won’t be much you can do about it. I know of one multi-unit franchisee who, on selling one of his units, first transferred Franchise New Zealand

Autumn 2021

Year 30 Issue 01