Brisbane Franchising Expo 2014

Last weekend we attended the Brisbane Franchise and Business  Opportunities Expo where local Franchise Accountants Network member, Carwardines & Associates were exhibitors. Also at the Expo was Jason Bertalli from BNR Partners in Melbourne. Peter and I  gave a brief talk on the importance of considering the financial aspects of buying a franchise. It was very well received, with around 40 people attending each talk, and some good discussions afterwards with people who were considering starting a franchise.

The day before the Expo we had a training day with several FAN members, where we discussed the type of advice which can help prospective franchisees make an informed decision.

Here are the slides from our presentation at the Expo

Buying a franchise: 3 Financial Questions

Owning a franchise can be a wonderful opportunity and an enjoyable experience. But it’s a business with money involved, so you need to be clear on how the money works. As a franchise owner, your income depends on the financial success of the business.  So it’s important to get an indication of how the bills can be paid and how much you can make.

To help you with this, here are 3 financial questions to consider.

1. How much will it cost to start the business? This could include franchise and training fees, equipment and fitout. You’ll also need enough money to cover expenses until the business is profitable.
2. What will it cost to run the business day-to-day? For instance, rent, wages, materials costs, advertising, royalties, leases, phones, electricity, accounting and bookkeeping.
3. What sales are needed to cover the costs? It takes time to build up the sales of a business, so be sure to find out how long it’s taken others to become profitable.

Some information to help answer these questions will be in the Disclosure Document, which a franchisor must provide. It’s also important to do your own research, for instance by asking existing franchisees, and getting professional advice.

Use this information to produce a budget and cashflow forecast. This will help give you an indication of whether you can afford the business, and can live on the income. A Franchise Accountant can help with this.

If your initial figures look reasonable, it’s time to dig deeper. Use what you’ve learned about the franchise to assess whether your expectations are achievable.

The financial side of running a business is really important and needs to have your attention. Even if you’re unsure about how to do this, the right advisers can help you get off to a solid start.

Remember…Buying a franchise can have significant financial consequences. That’s one reason the Franchising Code of Conduct states prospective franchisees must be advised to obtain independent accounting and business advice.

How to choose an accountant for your franchise

When you are looking for an accountant to work with your franchise, it’s useful to bear in mind there are essentially three types of accountants. There are those that focus on tax, others that focus on the business and there are others that have expertise with franchising. We’ll discuss the typical characteristics of each of these accountants and highlight their key points of focus. This will let you see the differences between them and help you decide which will best suit your needs.

Tax Accountants

The majority of accountants work in tax and compliance. This covers income tax, GST, preparing Business Activity Statements, other tax obligations and lodging the tax returns with the Australian Taxation Office.

They also prepare financial statements, which include the balance sheet and profit and loss statement. These show the results for the business at the end of the year.

Tax accountants are also involved in tax planning, which is finding ways to legitimately reduce the amount of tax that clients pay. Increasingly, many are also involved with Self-Managed Superannuation Funds, assisting clients with their own personal super fund.

Most will help their clients with bookkeeping and record keeping, so the accountant  can prepare their financial statements, balance sheets, profit and loss statements, and tax returns. Some offer assistance with software, help their clients work with MYOB, Xero, Quickbooks and other small business software packages.

However, tax accountants tend to keep their focus mainly on the tax issues. Most don’t analyse the figures, they just prepare them, and offer little in the way of specific business advice.

Business Accountants

Business accountants focus more on the review and appraisal of the business performance and look for ways to improve it.

They will typically be involved in preparing budgets and cash flow forecasts with their clients. This leads to management accounting which looks at how the results compare with targets, and why the business did not perform as expected. A business accountant will often help clients prepare loan proposals and the cashflow forecasts to support these.

Business accountants may be asked to prepare business valuations and are often involved in getting the business ready for sale.  Many work in the specialised areas of estate and succession planning, which is increasingly important as our population ages.

In short, the typical characteristic of a business accountant is that they are actively involved in providing business advice to their clients.

Franchise Accountants

Franchise accountants have particular expertise in working with franchises. They are familiar with the special characteristics of franchising, which are not found in every business. These can affect business and tax planning, as well as the general operation of the business.

For instance, franchise businesses have a contractual relationship between the franchisor and the franchisee. Franchise agreements typically run for a fixed period of time and there may be special provisions relating to the future sale of the business.

There are usually specific franchise obligations which must be met, particularly in regard to the purchase of supplies and equipment, fitout and refurbishment, and the systems and intellectual property of the franchisor.

These all need to be considered and factored into any projections and cashflow forecasts prepared for your franchise, particularly if you need bank finance. Your accountant can also advise on the most appropriate structure for your finance and loans. They should also check if there are requirements to provide reports to the bank, or franchisor on a regular basis.

For a franchise, two of the most important areas to get ‘right’ at the start are your start up costs and the ongoing costs to operate the business day-to-day. This includes your own income. You should work closely with your accountant so these are as accurate as possible. If these projections aren’t done well, it can lead to funding stress and anxiety once you’re up and running.  Your franchisor should be able to provide details relating to costs, and your accountant can give you an independent perspective.

What to consider when choosing your accountant

Whichever accountant you choose, it is important that you can communicate freely and openly with them. It works best when there is the free exchange of ideas and information between the two of you.

Your accountant should be able to outline your financial exposure and the risk of being financially committed to the franchise you are investing in. It is important they can and do work with you on preparing your projections and cashflow for the business. This will help you have a clear idea of what’s ahead and the targets you need to achieve.

They should also advise you on the most appropriate tax structure for your situation as well as be able to handle your tax and compliance obligations. Finally, check their experience in franchising and what other franchises they work with. This will give you some comfort they can handle your needs.

So, how do you choose?

As you can see, there’s no such thing as a ‘standard’ accountant. Each will have different specialities and experience as a result of clients they have worked with. So, to choose the best accountant, you need to think carefully about what you are looking for and the specific areas you need help with. Then seek out an accountant who you believe can provided you with the assistance you need.

This article was originally posted at www.smartfranchise.com.au. It was written by Peter Knight. Peter is a co-founder of the Franchise Accountants Network.

Saving to finance your franchise

Mixed in with excitement at the idea of becoming a business owner are always some financial concerns. Saving to finance your franchise will help reduce those concerns.

Questions that people ask are ones like:

How much will it cost? “How can I afford it? How will I pay the mortgage and the bills? How much can I make? How long before I make money?

These are natural questions, and they are important. That's because you'll need to invest some of your own money to get the business started and to provide working capital to fund its day-to-day operations. You will also need money to live on until the business makes enough to pay you a wage.

So, the very first step in starting a business is to build up your savings so you have the money to fund it. Having these savings will help you feel more confident as you approach starting a business, because you'll know you can pay the bills for a time, while things get off the ground.

Here are some practical steps to help you start saving to finance your franchise.

Reduce debts and increase savings

There are two parts here: less debt and more savings. Both are important!

Lower debt levels give you more flexibility to cope with the financial ups and downs of business. You'll also need savings to help you fund the initial start-up costs. Even if you get a loan to help your purchase your bank will still want to see some ‘skin in the game’. Savings will also give you money to live on while the business builds up to the point where you can take a wage from it.

Reduce expenses

Reducing your day-to-day expenses will allow you to save money, and live on less as your business starts up. This may lead to some tough choices for you and your family, but initial financial sacrifices are part of the price to pay for financial independence. Think about where you currently spend money and work out some areas you can make savings.

Be realistic about costs 

People who have got into business often say it cost more than they initially expected. So, when you're planning how much you'll need to fund your business, it's a good idea to allow for extra costs and a slower start-up than your initial optimistic estimates. Ask your franchisor and other franchisees for information to help you work out a realistic range of costs.

It's also helpful to ask an accountant to prepare financial projections and a cash flow forecast. Ideally you want to find one who is experienced in franchising and is realistic as well as supportive of your desire to start a business.

There are no guarantees in business but these tips will help you lay strong financial foundations and increase your chances of achieving your goals.

A version of this article first appeared in Franchise Buyer Magazine. It was originally posted on www.smartfranchise.com.au and was written by Kate Groom, who is a co-founder of the Franchise Accountants Network.

Buying a franchise: 5 financial conversations

To have the best chance of success in a franchise it's important to thoroughly assess the financial aspects of starting and running a business. Based on our experience there are 5 financial conversations you must have when you assess a franchise opportunity. These conversations will help you build a solid foundation for success and reduce the risk of financial problems once your business is open.

Here are our suggestions for who to talk to and what to discuss.

1. Personal and family finance

Your new business will be a huge part of your life, so it’s important to consider how it will fit in your life.

Start off by considering your goals and family life. What do you want from the next few years of your life? What sort of lifestyle do you want? Consider financial and non-financial aspects. Discuss this with your spouse  or partner, if you have one.

Also, it’s helpful to talk to a few franchise owners and ask them about the impact of business on their family and personal life. For example, what was it like at the start? How have things changed throughout their business ownership?

Once you’ve thought through all this it’s a good idea to write down your goals. Your business will form part of how you achieve them

Next, think through the financial aspects of the franchise you're considering and assess how it might affect your financial situation.

Early on in the franchise evaluation process you should obtain financial information from the franchisor. This will be included in the Disclosure Document, which all franchisors are required to provide. If you're considering buying into an existing business, there will also be figures from the vendor. At the very start you'll need to get a sense of how much revenue and profit the business can make and how long it takes to become profitable. Also, find out how much it costs to set up the business.

You can find some suggestions for financial questions in this article.

 2. Talk to an accountant

Part of the process of investigating a franchise or business opportunity is getting advice from an accountant experienced in franchise matters.

This is not just about help to set up a business structure or tax advice. The idea is to find someone who can work through the financial side of starting a franchise so you understand the implications and can make an informed decision.

With your accountant, work out detailed financial goals and produce a budget and cashflow for the business. This lets you see if the business will generate enough money for you to have the life you pictured.

To work out the budgets, use information about sales and costs from the franchisor. Also your own research regarding customer numbers, rent and other costs.

With your budget, consider what happens to the results at high, low and mid range sales, and also what the figures look like if costs increase. It’s important to do this so you can work out how you’d cope financially under different circumstances.

Now you have detailed figures, again consider your family situation. How do these insights change things?

3. Talk to a small business banker

Another financial conversation you’ll need to have is with a banker. Running your business finance is different from personal so talk to a small business specialist to get the right type of advice, proper business loans and bank facilities.

Your banker should be able to give you advice on financing options and also account types, credit cards and merchant facilities so customers can pay you. They can also help with superannuation and insurance if needed.

Many of the banks have specialist franchise bankers who understand the franchise industry, so make sure you ask for them.

The bank will want to see evidence of how you’ll be able to repay loans. So be prepared to show them that. It means having a business and personal budget, and also being able to demonstrate your plan and commitment. So, be prepared with a business plan.

4. Talk to a financial adviser

Even if you don’t have a financial adviser at the moment, it can be a good idea to get advice from a financial planer who can review your savings, investments and superannuation.

Taking on a business can be a big change in your life and it’s a good idea to take a look at any changes needed to your financial plans.  The adviser can also give you advice on what insurance to consider, for example life and sickness or disability cover.

Your accountant should be able to recommend a financial planner and work with them if needed.

5. Talk to a lawyer

Really? Financial conversations with lawyers? Yes, absolutely!

When getting advice on the legal aspects of becoming a franchisee, make sure you get an explanation of the financial implications of the arrangements you’re making and contracts you’ll sign.

If you’re in a relationship, it’s a very good idea to get individual legal advice on the financial aspects of business ownership, not just the franchise aspects. This allows both partners to ask their own questions about the risks and responsibilities – and to do so individually. Then you should talk through things as a couple.

Owning a business can be a fantastic opportunity to build wealth and achieve family goals. But don't neglect the financial conversations.

(A version of this article was originally published by Business Franchise Magazine in March 2013)

This article was originally published at www.smartfranchise.com.au. It was written by Peter Knight and Kate Groom, co-founders of the Franchise Accountants Network.