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Redundancies and low interest rates are major influences on people buying franchises.
Redundancies, lack of jobs in the market, and low interest rates are all major influences on people buying franchises, so many people are now considering the opportunities.
REDnews joined a webinar at franchise.co.nz to hear advice from three experts in the industry and find out whether it’s a good idea to join the $27.6 billion franchise industry.
“I’ve been made redundant three times in my life,” says publisher of Franchise New Zealand, Simon Lord.
“I was devastated each time, but something good actually came out of each event and I don’t think my story is unusual.
“Having been in franchising for over 35 years now, I’ve seen many franchisees succeed in their own business, but others have not. So, what makes the difference?”
The publisher says a franchise is the same as any other business - the secret to success is doing your homework first.
“You need to find the right opportunity to suit your own abilities and finances, and to ensure that you will receive the training and support you need to convert your efforts into a successful business.
“Most franchisees stay in their business for an average of eight years, so make sure you choose something you enjoy and have support on hand for issues that will arise,” he says.
Not all franchises are large international brands like McDonald’s, in fact 72% of the franchise brands in New Zealand are Kiwi-founded.
Not all franchises are large international brands like McDonald’s and KFC
So, is the current economy and New Zealand’s low interest rate environment a good time to buy?
Westpac relationship manager Dean Madsen has worked in the bank’s franchise department for more than 20 years and says there are both opportunities and risks.
“Westpac has been involved in franchise lending since the late 1980s, but we all know the world has changed a lot in 2020,” Madsen says.
“Post lockdown we’ve seen surges in a lot of businesses and decreased competition in some sectors, plus interest rates are very low which makes it cheaper to purchase a business,” he said.
Madsen outlined the following opportunities in the current economy:
- Landlords might be more flexible and prepared to make an attractive offer.
- Rental prices may be more reasonable.
- Good locations are more readily available.
- Good staff are available to hire.
- Decreased competition in some sectors.
- Funding costs have dropped due to low interest rates.
- Initial rent-free periods could be offered.
However, he outlined the following risks that the buyer should be aware of:
- Assess all risk, including economic risks.
- Understand the franchise model and do your due diligence on the business to get the fundamentals right.
- Shop around for the fundamentals – such as the cost of rent, location cost and your buying power.
- Get advice from franchise experts – such as an accountant, banker and lawyer.
- Do the numbers of potential returns and speak to your banker for finance options.
- Don’t overpay for an existing business. If you buy at the premium rate, the value might drop.
- Get up to date information on the business since COVID – not prior to the pandemic.
How to fund a franchise business:
Madsen says you must first understand your financial requirements and seasonal requirements of the business.
“Look at the business plan and your ability to run the business, including your experience, background and experience of the customer.
"Is there a requirement to refurbish the business?
If you were to buy a cafe, check to see if it will need a refurbishment that is extra cost.
“Look at wage costs because if they’re low then maybe it’s because there’s a couple each working 70 hours a week to keep staff wages low. That might put you in a position where you’re working long hours,” the Westpac franchise expert says.
“The bank would look at your ability to pay back the loan and assess sensitivity analysis to see how much stretch there is in the transaction - depending on projected turnover.
"The bank would also look at the potential downturn, which is what COVID has showed.
“Having rainy day cashflow set aside is crucial to sustain cycles like COVID or other things that can make business tough,” he said.
“The bank relies on projections and benchmarks to know what they can lend. A purchaser looks for return on investment, but the bank looks at it from a different angle.
“The bank can lend up to 50% of the business’s value, which is why you have to assess whether the business is overvalued.
"They would look at security too to see if it’s for sale for above market value.
“For example, if it’s a $400k café, the bank could lend $200k and/or take security on the purchaser’s house.
"The lender needs to see if the purchaser can service that debt, they may be eligible for 100% funding if they use their home as security,” Madsen said.
Advice from a franchise accountant
Director of Franchise Accountants, Philip Morrison, has more than 25 years of accounting, business and financial management experience.
“A lot of people who become franchisees are in a transition period in their life. During COVID, the first people who rang us were pilots looking for a franchise business,” he said.
When looking into a franchise brand, Morrison advises asking how much of that umbrella business is made up of franchising.
“If it’s a new business you need to speak to an advisor in that sector to benchmark its value and forecast its return on investment.
“This will probably be the most significant financial decision of your life, especially if you use your house as security, so find out if the business is new or if there a trading history.
“Since COVID there has been an adjustment in values, so it is a good time to buy now depending on the sector and location in New Zealand,” he said.
Morrison says that there are two types of franchises, one that is more like buying a job and the other is buying a business.
“If you buy a business that usually has staff and you’re running it, then that’s a business. If you’re buying a ‘man in a van type franchise’ - that’s more like buying a job," he says.
“You need to work out if you'll be able to afford the bills if you have a few quiet months. If the bank says no, they’re usually doing you a favour.
“The number one reason franchisees don’t succeed is when there’s not enough capital behind them. You don’t want to get a 30-year loan that you can’t pay back by the time you sell it,” he said.