September 20, 2016
The Pre-purchase Review
A Pre-purchase Review is an assessment of the financial aspects of the business you are looking to buy.
““Entering into a franchise business can seem daunting. We asked ourselves questions like, what’s involved and will we make enough money to support ourselves?” ~ Carolyn R”
The Right Questions
Any big decision can feel daunting: taking out a mortgage, starting a family or starting a business. Asking good questions can really help with the decision. For instance, “What are the financial implications for our lifestyle?” and “How will we pay for this?” You might also seek advice from a trusted friend or adviser. We regularly speak to people who are thinking of buying a franchise. No matter how enthusiastic they are, they know that the decision to buy a franchise is a big commitment and will have financial consequences.
As a result we have developed a structured and practical approach to help them: the Pre-purchase Review. In this article we use real life examples to highlight how the right advice can help you make a well informed decision and avoid a potentially costly mistake.
“If the numbers don’t look like they work before you even start, there’s little chance they will get better once you’re underway.”
Don't overlook financial considerations
As you investigate a franchise it’s easy to ‘fall in love’with a brand and the idea of owning your own business. In your excitement you might overlook some important financial considerations.Two things we often encounter are that franchise buyers are initially over-optimistic about the income potential of the business and tend to under-estimate their costs. This can lead to disappointment or financial stress once the business is open.
“James approached us because he and his brother were about to sign a franchise contract and needed a cashflow forecast for the bank. James was very enthusiastic about the franchise, which had been started by his brother’s business contact. As we worked with them, we suggested they ask for evidence to support the costs of running the business and the sales that could be achieved. This revealed the costs were likely to be much higher than in the financial model provided by the franchisor. They felt that the financial risks were too great and decided not to pursue the opportunity.”
But it’s not all gloom and doom when you approach accountants for help. Earlier this year a lady who was looking to buy into an established franchise approached us. And as we write this, she is about to sign the franchise agreement.
“Brooke wanted an independent accountant to help her assess the financial potential of the franchise. We worked through the numbers with her and provided questions to help her validate that the financial targets for the business were reasonable.”
Franchisors will tell you there are no guarantees about how much money you can make. That’s correct. But you still need some idea of what the financial side will look like. We developed the Pre-purchase Review to do this. Getting a Pre-purchase Review was an essential step to help us answer questions we had about buying a franchise.
"It allowed us to get a broad picture of what could be possible and gave us the clarity and confidence to negotiate the right franchise deal to suit our needs."~Carolyn R
- Many of the potential franchisees we speak to are looking for financial clarity and assistance to make sense of information they have received from the franchisor. They tend to have lots of questions regarding the financial side of their decision, such as:
- What level of sales do I need to achieve to earn a decent living?
- What will my monthly and yearly costs be?
- What financial questions should I ask existing franchisees and the franchisor?
- How much money will I need to cover my expenses until the business makes enough money to pay them?
The best prepared potential franchisees are looking for independent advice and help to answer these important questions. That’s what your franchise accountant should provide. A franchise accountant can’t tell you whether a particular franchise is the right business for you (that’s your responsibility to decide). However the right accountant can bring a structured and prudent approach to understanding the risks, evaluating the financials and getting your business set up right from the start.
