“A Cheat’s Guide? What’s that?” Well, it’s certainly not a guide to cheating in a franchise. It’s about helping you know some of the smart things to look at on the numbers side when you’re buying a franchise.
You’ve probably consulted a few cheat’s guides in the past. Perhaps a cheat’s guide to Christmas parties. The sort of thing that gives you tips on how to achieve a result without having to do all the hard work (such as making everything from scratch).
Understanding financial information isn’t something you can learn overnight. Just like you can’t become an expert baker overnight. But you can understand some of the things experienced advisers look for. This will make you a more informed franchise buyer and increase the likelihood you will make well considered choices about starting off in business.
Here are 10 things to look at when you’re assessing a franchise opportunity. They will definitely mark you out as someone who is thinking like a smart buyer.
1. Calculate your target sales
The key word here is ‘calculate’. Work out the costs of operating the business and from that calculate the sales that must be achieved to cover these costs. This is very different from projecting what you hope will be the sales.
2. Historical results
The first thing we do when we assist a franchise buyer is look at what information is included in the disclosure document. Despite what you might hear from franchisors, they are not prevented from including historical financial information. Information about historical sales, cost and profit is a great help when it comes to assessing what the financial future might look like.
3. Look back in time
The financial history of a business can help you assess its health and the strength of the opportunity. Look at three years profit and loss statements to identify the trends. Is there a pattern of sales increasing or decreasing? What about costs and profit? Ask why this is the case.
4. Monthly sales figures
What are the monthly sales over the last year (or two)? You will see there is some sort of pattern. This will help you work out what your sales pattern might be.
5. Wage costs
Work out the wage costs by calculating the cost of staffing the business at the level of sales you’re aiming at. This means asking the question “How many staff are needed to run the business and at what pay rates?”. This is the only realistic way to work out wages costs.
6. Debt must be repaid
Whether the finance to buy a franchise comes from your own money (savings, redundancy etc) or is borrowed from a bank, the money has to be repaid. So, before you get excited about the potential profit of a business, make sure you’ve allowed for repayment of the upfront costs within the first franchise term.
7. Your wages
The business needs to be able to pay you the market wage for the job you do in it. There are questions to be asked if your projections show that you have to work for nothing for more than a few months. It’s reasonable for it to take time for the sales to build up so this is possible. But unless the owner can take wages it’s not a viable business. Remember though, the wage is for the work you do in the business and it might be less than you are earning in your current job.
8. Profit after owner’s wages
In many franchises, we expect it to be possible to make a profit after paying wages to the owner for the job they do. This is the reward to the owner for taking the risk to get into business and for their skills in developing the business. How much is reasonable depends on the business and the skills of the owner.
9. Consider the future
In business, many costs increase each year. The rent figure which seems reasonable in the first year will increase every year. What will it be by the third or fourth year? What does that mean for sales? Minimum wages increase each year, and good staff will need financial incentives if they are to remain loyal. Other costs that can catch you out are repairs, refurbishments, or additional equipment. Again, what needs to happen to sales in order to pay these extra costs?
10. Look for evidence
The smart franchise buyer will look for evidence that their desired financial results are achievable. Evidence comes from both the past and future plans. How do your numbers compare with what others have actually achieved in the recent past? What are the franchisors plans for the future? What consumer trends help you assess whether your figures are reasonable?
Original Article appeared on 22/10/2018 in the Inside Franchise Business Publication.
6 Biggest Risks of Owning a Business –
Personal Liability: For any small business owner, one lawsuit could potentially result in the loss of a business, or worse – the loss of personal finances and assets. Because sole proprietors are individually responsible for any business claims filed against them, it is absolutely necessary to seek protection with personal liability insurance.
Insufficient Funds: As many banks are reluctant to lend money to sole proprietors who are lacking a proven track record of success, it can be extremely difficult for an entrepreneur to come up with the necessary funding to start a business. Even if enough funding is obtained for start-up, it is also important to have some extra cash as a cushion, should any unforeseen troubles occur.
Poor Planning: Too often, the excited and passionate entrepreneur becomes caught up in his or her vision without setting up a business plan that can turn that vision into a reality. It is imperative that a plan be put in place consisting of the company’s goals, potential problems and solutions, a marketing plan, and more.
Disability or Illness: In the event of a debilitating illness or accident, the unprotected small business owner is left to fend for himself. For a small business owner who plays a number of roles within the company on his own, you can imagine the devastating effects that a long, unforeseen absence can have. Disability insurance can help you avoid this risk.
Suffering Relationships: Keeping up with the demands of owning a small business can be exhausting, so much so that many small business owners don’t have time for much else. Suffering from strained relationships with family and friends can sometimes push entrepreneurs to throw in the towel.
Overly Ambitious Ideals: There is such a thing as growing too much, too soon. A number of small businesses that possess a high potential for success end up going under due to overexpansion. To avoid this pitfall, the entrepreneur must have the resources and funding that is necessary for growth.
These risks and others are vital for any entrepreneur to consider when “biting” into any new business venture. Once the risks are covered, a small business’s chances for success rise exponentially. The eventual payoff of this success is sweet, and well worth the risk.
Original Article Appeared below –
Read more at https://www.business2community.com/startups/6-commonly-overlooked-risks-when-starting-a-new-business-0158188
Sometime in the late 1800s—nobody is quite sure exactly when—a man named Vilfredo Pareto was fussing about in his garden when he made a small but interesting discovery.
Pareto noticed that a tiny number of pea pods in his garden produced the majority of the peas.
Now, Pareto was a very mathematical fellow. He worked as an economist and one of his lasting legacies was turning economics into a science rooted in hard numbers and facts. Unlike many economists of the time, Pareto’s papers and books were filled with equations. And the peas in his garden had set his mathematical brain in motion.
What if this unequal distribution was present in other areas of life as well?
At the time, Pareto was studying wealth in various nations. As he was Italian, he began by analyzing the distribution of wealth in Italy. To his surprise, he discovered that approximately 80 percent of the land in Italy was owned by just 20 percent of the people. Similar to the pea pods in his garden, most of the resources were controlled by a minority of the players.
Pareto continued his analysis in other nations and a pattern began to emerge. For instance, after poring through the British income tax records, he noticed that approximately 30 percent of the population in Great Britain earned about 70 percent of the total income.
As he continued researching, Pareto found that the numbers were never quite the same, but the trend was remarkably consistent. The majority of rewards always seemed to accrue to a small percentage of people. This idea that a small number of things account for the majority of the results became known as the Pareto Principle or, more commonly, the 80/20 Rule.
Inequality, Everywhere
In the decades that followed, Pareto’s work practically became gospel for economists. Once he opened the world’s eyes to this idea, people started seeing it everywhere. And the 80/20 Rule is more prevalent now than ever before.
For example, through the 2015-2016 season in the National Basketball Association, 20 percent of franchises have won 75.3 percent of the championships. Furthermore, just two franchises—the Boston Celtics and the Los Angeles Lakers—have won nearly half of all the championships in NBA history. Like Pareto’s pea pods, a few teams account for the majority of the rewards.
The numbers are even more extreme in soccer. While 77 different nations have competed in the World Cup, just three countries—Brazil, Germany, and Italy—have won 13 of the first 20 World Cup tournaments.
Examples of the Pareto Principle exist in everything from real estate to income inequality to tech startups. In the 1950s, three percent of Guatemalans owned 70 percent of the land in Guatemala. In 2013, 8.4 percent of the world population controlled 83.3 percent of the world’s wealth. In 2015, one search engine, Google, received 64 percent of search queries.
Why does this happen? Why do a few people, teams, and organizations enjoy the bulk of the rewards in life? To answer this question, let’s consider an example from nature.
The Power of Accumulative Advantage
The Amazon rainforest is one of the most diverse ecosystems on Earth. Scientists have cataloged approximately 16,000 different tree species in the Amazon. But despite this remarkable level of diversity, researchers have discovered that there are approximately 227 “hyperdominant” tree species that make up nearly half of the rainforest. Just 1.4 percent of tree species account for 50 percent of the trees in the Amazon.
But why?
Imagine two plants growing side by side. Each day they will compete for sunlight and soil. If one plant can grow just a little bit faster than the other, then it can stretch taller, catch more sunlight, and soak up more rain. The next day, this additional energy allows the plant to grow even more. This pattern continues until the stronger plant crowds the other out and takes the lion’s share of sunlight, soil, and nutrients.
From this advantageous position, the winning plant has a better ability to spread seeds and reproduce, which gives the species an even bigger footprint in the next generation. This process gets repeated again and again until the plants that are slightly better than the competition dominate the entire forest.
Scientists refer to this effect as “accumulative advantage.” What begins as a small advantage gets bigger over time. One plant only needs a slight edge in the beginning to crowd out the competition and take over the entire forest.
Winner-Take-All Effects
Something similar happens in our lives.
Like plants in the rainforest, humans are often competing for the same resources. Politicians compete for the same votes. Authors compete for the same spot at the top of the best-seller list. Athletes compete for the same gold medal. Companies compete for the same potential client. Television shows compete for the same hour of your attention.
The difference between these options can be razor thin, but the winners enjoy massively outsized rewards.
Imagine two women swimming in the Olympics. One of them might be 1/100th of a second faster than the other, but she gets all of the gold medal. Ten companies might pitch a potential client, but only one of them will win the project. You only need to be a little bit better than the competition to secure all of the reward. Or, perhaps you are applying for a new job. Two hundred candidates might compete for the same role, but being just slightly better than other candidates earns you the entire position.
Situations in which small differences in performance lead to outsized rewards are known as Winner-Take-All Effects.
These situations in which small differences in performance lead to outsized rewards are known as Winner-Take-All Effects. They typically occur in situations that involve relative comparison, where your performance relative to those around you is the determining factor in your success.
Not everything in life is a Winner-Take-All competition, but nearly every area of life is at least partially affected by limited resources. Any decision that involves using a limited resource like time or money will naturally result in a winner-take-all situation.
In situations like these, being just a little bit better than the competition can lead to outsized rewards because the winner takes all. You only win by one percent or one second or one dollar, but you capture one hundred percent of the victory. The advantage of being a little bit better is not a little bit more reward, but the entire reward. The winner gets one and the rest get zero.
Winner-Take-All Leads to Winner-Take-Most
Winner-Take-All Effects in individual competitions can lead to Winner-Take-Most Effects in the larger game of life.
From this advantageous position—with the gold medal in hand or with cash in the bank or from the chair of the Oval Office—the winner begins the process of accumulating advantages that make it easier for them to win the next time around. What began as a small margin is starting to trend toward the 80/20 Rule.
If one road is slightly more convenient than the other, then more people travel down it and more businesses are likely to build alongside it. As more businesses are built, people have additional reasons for using the road and so it gets even more traffic. Soon you end up with a saying like, “20 percent of the roads receive 80 percent of the traffic.”
If one business has a technology that is more innovative than another, then more people will buy their products. As the business makes more money, they can invest in additional technology, pay higher salaries, and hire better people. By the time the competition catches up, there are other reasons for customers to stick with the first business. Soon, one company dominates the industry.
If one author hits the best-seller list, then publishers will be more interested in their next book. When the second book comes out, the publisher will put more resources and marketing power behind it, which makes it easier to hit the best-seller list for a second time. Soon, you begin to understand why a few books sell millions of copies while the majority struggle to sell a few thousand copies.
The margin between good and great is narrower than it seems. What begins as a slight edge over the competition compounds with each additional contest.
The margin between good and great is narrower than it seems. What begins as a slight edge over the competition compounds with each additional contest. Winning one competition improves your odds of winning the next. Each additional cycle further cements the status of those at the top.
Over time, those that are slightly better end up with the majority of the rewards. Those that are slightly worse end up with next to nothing. This idea is sometimes referred to as The Matthew Effect, which references a passage in The Bible that says, “For all those who have, more will be given, and they will have an abundance; but from those who have nothing, even what they have will be taken away.”
Now, let’s come back to the question I posed near the beginning of this article. Why do a few people, teams, and organizations enjoy the bulk of the rewards in life?
The 1 Percent Rule
Small differences in performance can lead to very unequal distributions when repeated over time. This is yet another reason why habits are so important. The people and organizations that can do the right things, more consistently are more likely to maintain a slight edge and accumulate disproportionate rewards over time.
You only need to be slightly better than your competition, but if you are able to maintain a slight edge today and tomorrow and the day after that, then you can repeat the process of winning by just a little bit over and over again. And thanks to Winner-Take-All Effects, each win delivers outsized rewards.
We can call this The 1 Percent Rule. The 1 Percent Rule states that over time the majority of the rewards in a given field will accumulate to the people, teams, and organizations that maintain a 1 percent advantage over the alternatives. You don’t need to be twice as good to get twice the results. You just need to be slightly better.
The 1 Percent Rule is not merely a reference to the fact that small differences accumulate into significant advantages, but also to the idea that those who are one percent better rule their respective fields and industries. Thus, the process of accumulative advantage is the hidden engine that drives the 80/20 Rule.
Article from James Clear www.jamesclear.com 30/3/17
Consideration Number 1 – Not Advertising Your Business Correctly. In order to sell the business it must be advertised. Before you select a business broker, ask them about their advertising, the cost, the coverage, the expected responses and what markets they target. Do they simply put your business on 3 or 4 sites and hope for the best or are they more aggressive with placement and work hard to put your business in front of genuine business buyers. Moreover, of significant importance is an advertising schedule. Make sure your broker shows you where the ads will go, the categories, the coverage, have them show you a list of websites where your business will appear. Any reputable broker should be able to do this. I see time and time again vendors have paid agents thousands of dollars thinking they have coverage, and it is only 2 or 3 sites with no upgrades. Let me tell you, a targeted campaign with specific upgrades should get results. Selling your business for the highest possible price is about creating competition amongst the pool of buyers, only the correct advertising can do this.
Consideration Number 2 – Listing with a “Commission Free” agent. Appearing more and more on the business broking scene are agencies offering a “No commission” or DIY listing option. What does this mean, are they a business broker or not ? If a genuine business broker doesn’t sell your business, then you won’t pay a commission anyway, it is only ever paid on sale. Typically, with these DIY options advertising money is paid up front usually at a much higher rate than normal, and this is how the agency get paid. They would rather make a small amount upfront from the listing of your business, not give it the advertising coverage you think you paid for, and don’t really care if it sells. They tell you they pass on all the leads to you to handle, but in reality, who’s to say they don’t grab those leads who may be genuine business buyers, and set them on other business they have listed which are commission based. A reputable broker is across his industry, up to date with legislation, landlord issues, legal and accounting negotiations, there is so much to a successful business sale. This makes it difficult for a vendor to continue to run their business AND put the effort into selling themselves. In addition, you, the vendor won’t know what is being sold in the marketplace and may severely undersell your own business. Worse still, you may overprice it because you have no guidance from a reputable hands on broker and it could sit idle for months. I would advise to stay away from No Commission agents.
Consideration Number 3 – Listing with the broker who has the cheapest commission. The old adage “you get what you pay for” comes to mind. It’s not really about the commission, it’s about selling your business. Many agents will offer the cheapest commission only to have your business added to the hundreds of listings they have in what they call the numbers game. The more listings they have, the more they should sell. While that’s true to a certain extent, look for an agency who has less listings but more sales. They take the business and work hard to get a result. A cheap agent cannot deliver these outcomes if he is discounting his own commission just to obtain the listing. If an agent cannot negotiate his own commission, how can you trust him to negotiate the best price for your business? Simple – you can’t.
Consideration Number 4 – Listing your business with more than one agent. The reality is that business’s listed with more than one agent take longer to sell. That’s a fact. Think about it, often they are advertised on the same sites, and buyers are very diligent. They always look to compare what’s on the market, and when they see your business listed with different agents, often for different prices, it scares them away. The effect is “what’s so wrong with this business and why are they desperate to sell?” Most reputable agents only work with exclusive agreements and you should consider this if you are looking to sell. Also, think about the level of commitment you are going to get from the agent. He knows that others are working on the business and he might not get paid so he will take his buyers elsewhere or not negotiate hard for you in order to get the best price. Remember, there are only a certain numbers of buyers in the marketplace so stick with one broker at a time. Listing with more than one agent is a big mistake.
Consideration Number 5 – Not Preparing your Business Correctly. Marketing a business for sale which is not properly prepared is a major issue and could cost you in both sale price and time on the market. Think about it, you wouldn’t sell your house without cleaning it up, have display furniture installed, tidy up the gardens and make all those minor repairs and facelifts. We see the difference on all the reality TV shows how significant a makeover on a property can be. Business are essentially the same. Have all your documents ready for the buyer. These include your leases, transfer of leases, licenses and permits, financial reports and BAS statements just to name a few. The list is really extensive. Buyers will need this information in a timely manner. At TRIDENT, we go one step further. A complete and detailed Information Memorandum is prepared for every business. These documents are the only way to present your business to the market. There is too much competition to sell your business and a significantly higher level of presentation ensures a quicker sale, higher price, approval for finance, assist with due diligence, and answers all the questions that a buyer could have. If your business broker is not presenting your business this way then how is it being presented? One of the biggest mistakes you can make is not presenting your business correctly. At TRIDENT we are experts at this, talk to us.
Consideration Number 6 – Falling for the broker who tells you the highest price. There are many unscrupulous brokers who will over quote the expected sale price of your business just to get the listing. They will list your business for as long as possible and in the meantime will spend time conditioning you down to expect a lower selling price. Remember this – The business broker is not going to buy your business! Ask them to explain their estimation of price, show comparable sales, evidence of what they have sold and what prices were achieved. It is really important that you list the business for a realistic price. There are things you can do to your business to ensure the best possible sale price, but placing a ridiculous selling price and hoping for the best because the broker said so is not one of them. Be realistic, look at the market. At TRIDENT we will always give you a thorough explanation of our appraisal so you know why we state the prices we do. We also conduct business valuations and this methodology is invaluable in presenting your business to ensure we get the best possible price. Beware of the brokers who want to “buy your listing”.
Consideration Number 7 – Look for the REIV Accreditation. The Real Estate Institute of Victoria (REIV) ensures their business broking members have the following –
Qualifications. All REIV Members must have completed certified training and undertake a Continuing Professional Development Program.
Knowledge. REIV Members have exclusive access to the latest sales data, median prices and legislative information.
Protection. All REIV member agencies are covered by professional indemnity insurance cover. This provides comprehensive protection against potential claims and disputes.
Trust. REIV Members follow an industry Code of Conduct and Rules of Practice in acting ethically, honestly and fairly.
The REIV accreditation is the only logo you need to look for. At TRIDENT, we are part of this organisation and I am on the Victorian Committee for the Business Broking Chapter. At TRIDENT, we are business sales specialists, feel free to contact Brian on 0417 303 196 for an obligation free discussion on the sale and value of your business.
Considering Selling your Business ? Look out for these points.
- Not advertising your business correctly
- The Perils of Listing with a “Commission Free” agent
- Listing with the broker who has the cheapest commission
- Listing your business with more than one agent
- Not Preparing your Business for Sale Correctly
- Falling for the broker who tells you the highest price
- Look for the REIV Accreditation
The typical business owner will only sell a business once. Understanding the complex process involved will help produce the best results, but don’t fall prey to the myths that can derail or seriously affect a potential sale.
Myth #1 – I Can Sell It Myself
The market approach sets a value based on the values of other similar businesses that have been sold. Setting the market value involves researching the sale prices for similar businesses in a geographic area. In some cases, however, finding a company that is similar in many ways to your company may be difficult.
Whatever your goal, you want a good advisor to help you assess the value of your company. Question your advisor on the effects of deal structure and how multiples are used. A business owner should never accept a computer-generated valuation or a one-size-fits-all approach when selling the business. Moreover – don’t be impressed by the person who presents the highest value – you may only be setting yourself up for failure during the sale process. Many business brokers take this approach just to obtain the listing, it is wrong.
Myth #2 – I’ll Sell When I’m Ready
Certainly, an owner wants to be sure he or she is mentally and emotionally prepared to sell. But personal readiness is just one factor. Economic factors can have a significant impact on the sale of a business.
Sale prices can be affected by industry consolidation, interest rates, unemployment and many other economic measures. Talk with a professional and aim to sell when your personal goals and market conditions align.
Myth #3 – I Know What it is Worth
Some owners will base the company value on what they need for retirement. Others will tell you they want $100,000/year for “sweat equity.”
A third party valuation is a good idea for anyone seriously considering the sale of their business. An outside valuation will include a thorough analysis of the business and the market it operates in. This will provide a solid understanding of the company’s growth potential, not some vague industry average.
Myth #4 – It’s Like Selling a House
Selling a company is much more complex than selling a house. A successful business sale requires a great deal of pre-planning, at least a year and maybe as long as three years to drive sales, develop key staff, document the operations and control expenses.
The average house will sell in less than four months, while the average business sale is nine months to a year.
Even after the business is sold, the seller can be expected to put in at least a few months, and possibly years of transition time, helping to make the new owner a success.
Article from IBBA Website “Common Business sales Myths” https://www.ibba.org/resource-center/qa/
Franchisees don’t do their homework and are too optimistic about risks according to a study.
Franchisees are unrealistically optimistic about risks of setting up their business, even after those risks have been disclosed to them, our research shows.
We tested this unrealistic optimism by surveying 205 current US franchisees from 26 brands. We chose the US because there is publicly accessible data about the identity of franchisees there (in Australia this does not exist). It’s this information US franchisors are required to provide that should alert intending franchisees to the risks of their agreement being terminated.
We asked individual US franchisees to answer the degree to which they are more or less likely to experience a certain risk than the “average” person operating a franchise in the same brand. This focused on the risk of the franchisor terminating their franchise agreement in two scenarios:
- Solely so the franchisor could sell their business to a new franchisee for higher franchise fees.
- So the franchisor could operate the successful unit themselves.
Our data revealed that for both scenarios, more than 80% of franchisees believed they weren’t likely to be affected, which is concerning considering the serious consequences to a franchisee of either event occurring.
Policy makers assume that the presence of disclosure laws mean franchisees will do their homework before committing to a particular franchise. Our research shows that these assumptions are wrong.
The risks of early termination of a franchise agreement
A franchise is a complex, expensive, purchase that will commit the franchisor and franchisee to a business relationship with each other for several years. The franchisor has usually sold many franchises, and signed many franchise agreements but buying a franchise is something a franchisee may do only once in their life.
To help franchisees avoid making such a significant decision on impulse, the law requires that franchisors provide a disclosure document replete with information. Although the contents vary from country to country, the disclosure requirement is widespread.
Disclosure laws are based on an assumption that franchisees are rational. They will read and understand the disclosed material, take professional advice on anything they do not understand and will not commit until they understand the risks and satisfy themselves as to how they will manage them.
US franchisees are alerted to the possibility that their franchisor might terminate their agreement in one of four ways. The franchisor has to summarise how it could terminate the agreement in a disclosure document by law.
This includes stating whether the franchisor has the right to terminate “at will”; meaning that the franchisor is not required to give the franchisee any opportunity to remedy defaults. The franchisor must disclose the annual number of franchisees terminated to date without compensation and must include the names and contact details of former franchisees whose agreements have been terminated by the franchisor.
Surely, equipped with all of this information, a prospective franchisee would realise that they too, could find their newly minted franchise agreement opportunistically terminated by their franchisor. Our research shows that most do not.
Optimism of franchisees
Franchisors do sometimes terminate franchisees’ agreements “at will”. A statistical analysis by Emerson of 342 US cases involving a franchise agreement terminated by the franchisor, shows in 49 cases the cause of termination is listed as being “at will”. Of these 49 cases, only 11 found in favour of the franchisee.
These results indicate that there is a real risk faced by franchisees that a franchisor will opportunistically terminate the franchise agreement. This information about US franchisees makes us wonder about Australian franchisees.
Franchisors in Australia provide pre-contract disclosure prescribed under the Competition and Consumer (Industry Codes—Franchising) Regulation of 2014. This includes information such as the identity and business experience of the franchisor.
It also discloses any litigation the franchisor is involved in, who the franchisor pays to introduce franchisees to the system, the number and business address details of up to 50 existing franchisees and key details of relevant master franchise agreements. It explains the status of intellectual property like registered trademarks that the franchisee will be allowed to use.
Under headings related to supply of goods or services to a franchisee, there is financial and logistical information that covers aspects like online sales. The franchsior’s policy and practice about sites or territories is explained.
Financial issues are disclosed, as are arrangements that will apply at the end of the term. The franchisor must provide a signed statement that it is solvent, although research shows that a small number of franchisors sign the disclosure statement confirming they are solvent when they are not.
All this information makes franchisees think the disclosure documents tell them all they need to. But, because there is no public database of franchise disclosure in Australia, franchisees can not compare their chosen franchisor with other brands.
And, as our US-based research shows, even a detailed pre-contract disclosure document that clearly outlines real risks may not convince franchisees that franchising can be risky.
Article appeared in Franchisebusiness.com – originally published in The Conversation – written by Jenny BUCHAN
