A decision to go into business

A decision to go into business

The Christmas and New Year holiday period is often used as a time of reflection.  A time to get things into perspective and to become grounded with family life once again after a pretty strenuous year crust earning.  This reflection will frequently raise questions about the balance of one’s life in relation to that spent in an office / behind a steering wheel / in yet more meetings, whilst not knowing when the call will come about your future employment, or lack of it.  Such are the times in which we live and such are the drivers of thinking about going into business for yourself.

Franchising is clearly a logical option to investigate when extending this line of thinking.  The well-known statistics about the security of a franchise system fully followed by enthusiastic franchisees as opposed to the high proportion of new start failures when going it alone are well known by readers of Business Franchise Magazine.  Though buying into a franchise is a logical way to go into business it is a process that must be approached with eyes and ears fully open.

It’s one of the things I impress upon would-be investors looking at buying a franchise for the first time. Primarily they will think about it as a source of income, which on one level of course it is.  But buying a franchise isn’t like buying a job. It’s a real investment, one that, with the right level of input, should ensure the business appreciates in value over the term of the franchise agreement.

Buying a new franchise, one with a territory for example, will involve the initial franchise fee payment, and will then require the input of the franchisee that, with the support of the franchisor, should market and grow the business until it is profitable. If, after five years – the typical term of a franchise agreement – the franchisee then wishes to sell, multiples of the initial outlay may be recouped based on the businesses success.

Buying an existing business (a franchise resale) is a slightly different story, requiring a greater amount of due diligence by the purchaser, and a more robust breaking down of the figures – particularly turnover and profit.

The upside to buying a resale however is that it is much easier to see how well a business has performed, versus how well a new business is likely to perform – fact versus projections. It’s an important distinction. What it means is that, while buying a new franchise can to some extent be ‘finger in the wind stuff’ buying a resale is more heart-warming as you know the track record of the business at the start. You hit the ground running with an already trading business.

With detailed provision of information by the seller and with careful assessment you, the prospective purchaser, will be able to unpick the business and see if there are areas where it can be improved. Has the former franchisee been as active with local marketing as you intend to be?  Are there logistical elements to the business that can be tweaked to boost performance?  What were the former franchisee’s personal circumstances – had they suffered illness or gone through a divorce?  These are all things to consider when purchasing a resale as they give clues to where you might be able to take the business in the future. And it’s imperative to look at the business from all angles. A bit like buying a house – you need to see it at different times of the day and different times of the week…does that irritating dog of the neighbours bark all of the time?

You’re making an investment, and you want it to be as informed as possible. Once you’ve put ink on paper, you don’t want to discover that all of your imagined nightmares are quite real. Which is why using a service such as that provided by Franchise Resales genuinely helps to smooth what could otherwise be a challenging process for franchise sellers, potential franchise buyers, and franchisors.

In a nutshell, sellers require a structured approach because they want a swift and smooth sale of the franchise they’ve worked to build; buyers require one because they want to invest in a going concern but need to understand the detail of that business; and franchisors (with an entire network to worry about) want an experienced third party to handle the complex resale processes and remove the headaches that can come from brokering a franchise resale.

At Franchise Resales, we have real experience in making the buying and selling of a franchise as seamless as possible. This includes not only the provision of detailed information but also support with negotiation, the introduction of solicitors for the legal process and banks to secure funding – yes funding is readily available for Franchise Resales structured transactions.  Most importantly we are there for support and to provide solutions should anything not go according to plan.

Enjoy the festive season ahead.  This can be a time of reflection and some will use this time to contemplate their futures and explore the benefits of purchasing a franchise resale to start a new phase in their business life.

Obtaining funding

Every business whether an international PLC, a multi-unit operation or a single operator business requires funding.  This applies just as much to a franchise resale acquisition, all require that lifeblood of any business – adequate funding.  It may be you are able to acquire the business from personal or family money removing the need to go to a bank but for most resale transactions this is not the case.

Whilst there are various avenues open to obtain funds, the usual route is to opt for a loan from one of the main banks that specialise in and actively support franchising. It is here however than many plans for owning a business can come to a halt due to poor preparation.  The key to successful funding is a planned structured approach. Those of you who attend bfa accredited franchise exhibitions will have had the opportunity to participate in the Franchise Finance Business Planning Clinic providing an insight into the realms of business plans and the secrets of success.

When approaching a bank there are some points to bear in mind if you wish to be successful in your application.  Firstly don’t leave it too late to make an approach.  An initial enquiry will register you on the banks radar and will provide some basis information about the process involved and their individual requirements.  Secondly don’t just pop into your local branch of the major high street banks.  As with much in the franchise sector you will require specialist advice from a franchise specialist so in each case make contact with the franchise units of the banks.  The best place to find out their contact details is via the British Franchise Association web site www.thebfa.org. The main banks involved in funding for franchises are: Lloyds Banking Group, HSBC and RBS/NatWest though MetroBank are newly entering the market.

The next point to consider is that any borrowing will require some form of security.  This may be provided by the bank taking a charge over your house or other property or, if you do not have any available equity in your property or do not own a property, via the government’s Enterprise Finance Guarantee Scheme (EFG).  The EFG was put in place to provide funding for enterprises where there was not adequate security available to establish a business.  The EFG scheme can be used for both new starts and resales.

Whilst the EFG scheme sounds like ‘manna from heaven’ the basic requirement before being able to secure funding via this scheme is to have your entire business plan and projections approved by one of the above banks.  They will put your application forward for approval under the scheme.

The core element of any funding proposal is the Business Plan.  This is not just a cashflow projection; it is a comprehensive summary of the whole business.

A successful business plan will include a cashflow and profit forecast for the business and this will probably cover at least three years trading.  These must be backed by solid logic so there is no point taking a business generating a small profit and expecting a bank to accept the business will, for example, double in size within the first year – without some concrete evidence of how this will be done.

The business plan must also cover the marketing and sales activity that will be carried out and how you see the current shortcomings of the business being overcome by your activity.  A SWOT analysis is the best way to tackle this. Finally your personal background CV and skill-set must be included as well as a detailed statement of your personal finances – a personal profit & loss account. All of these elements together comprise your business plan and funding application.  They will of course also form the base upon which to monitor the growth of your future business.

Take your time

Avoid pitfalls, take your time.

Quite a lot of our time at Franchise Resales is spent in one to one discussions with franchisees who are seeking advice about optimising the value of their businesses and planning their exit from their particular franchised network.  The vast majority of these are seeking to realise the value of their investment in their franchise to be able to retire or occasionally a franchisee will be looking to sell to move on and acquire an alternate franchise.

Sometimes however the call comes from a franchisee who just doesn’t like the franchise they have bought or has been offered an employed position by an external company and who wishes to return to that world.  In each of these situations it is very difficult to be able to offer a cost efficient solution to the franchisee concerned.  This is because the businesses involved have usually either hardly got off the ground or have slipped in terms of financial performance as the owners focus has moved away from developing the franchise to pursue other interests.

In each case, a discussion with the franchisee who is wishing to sell, usually indicates that they had not spent very much time investigating the world of franchising.  They may have not understood what it means to be a franchisee and had not established whether the particular brand under investigation or franchise life in general actually suited them.  Most franchisors that are members of the British Franchise Association (bfa) adhere to the bfa code of ethical conduct and spend considerable time in discussion with franchisees prior to allowing them to sign up and join their particular franchised network.  They can however only do so much.  It is up to a franchisee who is looking for a business to apply a bit of due diligence to their investigations themselves.

Owning a franchise is not like having a job – there is usually very little or no income available at the end of the month if sales are not generated.  The success of a franchisees business depends almost entirely on the effort and energy employed by that franchisee.  It may be that some leads and enquiries are generated through the franchisors central operation but usually franchisees are expected to generate their own sales turnover.  So one of the skills or personality traits that every successful franchisee has to develop is the ability to get on with and interact with other people in a business context.  Some of the best sales people are likeable individuals and most folk want to do business with people they like so this element of a potential franchisees skill set is crucial.

One place to find out what it is like to be a franchisee is by attending one of the “Real Franchise Stories” panel discussions at the franchise exhibitions held in Manchester (June) , London (September & March)  and Birmingham (October & February).  Here you will be able to ask questions of current franchisees who have made their time available to help those considering buying into a franchise, hearing how it was and is for them being franchisees.

There is also the situation where a franchisee doesn’t like the ‘day job’ of the business they have entered. It is difficult to be a motivated and enthusiastic driver of a business that you just don’t like doing.  Sometimes this has been because there wasn’t enough research carried out or discussions held with existing franchisees before the commitment to join was made.  Our advice in Franchise Resales is always to take that extra bit of time and speak to as many existing franchisees as possible within the brand you are investigating before making a decision to join.

A good way of seeing whether a particular business is for you is to look at a franchise resale – to buy an existing franchise from its current owner rather than stepping into the unknown with a greenfield location.  A franchise resale has clients and business from day one; it has everything in place for a new owner to take over and develop further and most importantly the brand is already known in the local marketplace. In other words you know what you are getting in to; the evidence is there in terms of trading history and business performance.
Franchise resales are available in most business sectors and to see a list of those currently available, click on our Buy a Franchise tab because as indicated at the start of this article many successful franchisees are now planning retirement so there is a growing number of franchise resales opportunities coming to market.