The Ups and Downs Of Franchising

September 2, 2012 by John Denton Leave a Comment

“If I could get out of my franchise …”

It happened again recently! I was talking to a franchisee about her chances of selling her franchise business and she came out with the statement I hear so often from franchisees – “If I could just get out of my franchise for what it cost me to get in to it, then I would be happy”.

I hear this so often from franchisees struggling to make a profit in their business. Often they are in a retail situation in a shopping centre. After a few years they realise that the only people making any money are the shopping centre owners and the franchisors. In effect, the franchisee is working to keep the shopping centre owners and franchisors in the lifestyle they have come to expect!

Unfortunately, once you are IN and have invested the money, it can be very difficult to get out and recover your costs. If the lease is in the franchisee’s name then you are stuck with that as well. If the lease is in the franchisor’s name, which it often is these days, then the franchisor may be able to terminate your franchise agreement for not meeting targets, put a manager in to the store to keep it running and protect the brand and then recruit a replacement franchisee to take over. The franchisor and their brand are well protected.

Look, I am not against franchises! There are some excellent franchise businesses out their and most franchisors will do the right thing by their franchisees! My point is though that people need to have their eyes open when considering a franchise and understand what they are getting in to.

When you get in to a franchise – new or established;

(1) You are not buying a business! You are signing up to an agreement to operate a business for a ‘term’. That means that you effectively have a license to operate one of the franchisor’s businesses for a period of time (the ‘term’).

(2) There is no guarantee that your agreement will be renewed at the end of the ‘term’ or that you will be able to sell the business. READ THE AGREEMENT AND GET LEGAL ADVICE! Know what will happen at the end of the ‘term’ and what your options will be.

(3) No matter how well you build the business over the ‘term’ the client base (goodwill) belongs to the franchisor.

So, I always say “Find out how are you going to get out of it before you get in to it.”

As I said above, there are some very good franchise operations in Australia and we have such a strict Code of Conduct for Franchisors – as part of the Trade Practices Act – there is no excuse for a prospective franchisee NOT having their eyes open before they sign up.

Always speak to existing franchisees and see how they are going, and if possible, franchisees who have left the franchise. Under the Act the franchisor must provide details in their disclosure document for you to do this.

To view a Guide To The Franchising Code of Conduct for franchisees CLICK HERE

Thinking of buying or selling a business, of any kind, then attend one of my half day workshops on buying and selling businesses – click on WORKSHOP PROGRAMS tab above.

Regards John

“Helping business owners preapre their business ‘ready for sale’ because a business which is ready for sale is well worth keeping!”

Buy A Business – What You Need To Know

May 2, 2012 by John Denton Leave a Comment

When I am asked to help a buyer who is looking at buying a business, the meeting is usually me asking a long series of questions. Many of the questions end up being questions which the buyer should be asking the seller in relation to the business and their reason for selling.

At the end of the meeting with the buyer, they will often say “Thank you, now I know what I need to know and what questions I should ask”. Then I sit and wonder why they hadn’t thought of these seemingly obvious questions before. But of course, if you haven’t been through the process of buying a business before – then you don’t necessarily know what you need to know!

It’s all about asking the right questions to get the right information to be able to make the right decision FOR YOU! The trick is knowing what information you need!

There are some basic areas that you need to explore as a potential buyer and therefore areas as a seller which you need to have covered. These are;

(1) Why is the seller selling? (Especially when they are telling you what an excellent business it is.)
(2) Financial aspects of the business. The seller should be able to provide you with ‘year to date’ figures and finalised accounts to the end of the last financial year. If they can’t why not?
(3) How much should I spend on a business? It’s not just about price but also working capital etc.
(4) Non financial aspects of the business. Just a few of the things are lease arrangements, staffing, systems, barriers to entry, seller hand over period, seller not competing… and many more,.
(5) Questions to ask yourself. Why do I want to own a business and why this one? Just for starters.

If you are thinking of buying a business then plan and prepare before you even start looking.

Buying a business is a major decision for most people. Unlike buying a home, where if you end up not liking it you can always sell it again and get something for your money. If you buy a business and it all goes pear shaped, you could end up with nothing to sell and lose everything – including your home! Don’t take the chance! Seek good advice before proceeding – CLICK HERE.

Having said all that, if you buy the right business for you and for all the right reasons it could be the best investment you ever made!

All the best in your decision making – John Denton (See Upcoming Events – For More Opportunities to Learn)
_________________________________________________________________________________________________________

Upcoming Events – This is where I recommend upcoming events which I believe are well worth attending if you are in business or thinking of getting in to business. They may be my events or events by people I know and trust to do an excellent job.

My Monthly Business Owner Mentoring Groups – ongoing – CLICK HERE for details.

June 7^th – “Buying and Selling Businesses” at the Small Business Centre – Stirling. Half a day and I am the presenter.

May 5^th – Mal Emery’s “From Frustration To Freedom” workshop – Your Choice between Financial Freedom or Slavery in the Chaotic New Economy”. Hands on 1 day workshop . Mal will make this FREE for you as you are my special guest. That saves you $297 (single) or $594 (double).

May 23^rd – Sue Papadoulis, who is an expert in gaining free publicity for your business, is speaking on “Publicity For Profit” at the Wanneroo Business Association breakfast meeting. Sue has addressed my mentoring groups on two occasions and is terrific value!

I Told You So – Shopping Centres & Franchises

May 21, 2011 by John Denton 1 Comment

I don’t say “I told you so” very often, but I felt the urge to do so after reading a detailed article in the West Australian newspaper. The article is titled “Small retailers feel the squeeze of big shopping centre landlords”. (Unfortunatley, the article is not available on their web site).

The article backs up what I said in my blog post (on this site) on 1st April 2009. The post was titled “Sleepless In Perth”. I quote from the article in The West Australia – Saturday 5th December 2009, Business Section:

“Most (small retailers) mortgage themselves to the hilt to meet fit-out costs that they are barley able to recoup by the time their five year leases expire.

So when the leases come up for renewal, some owners find themselves defenceless against what they view as often ruthless, complicated and unfair leasing practices of the centre operators.”

This is so true. I have appraised businesses where the owner is still carrying debt from their fit-out after five years and facing a hike in rent for a new lease and another fit-out! I am currently working with an owner of a franchise retail business in a major shopping centre. I quote from his email to me:

“Rent and Electricity currently runs at approx $8,400 per month $108,000 per annum this is what we are paying today, when the new lease rate kicks in this will jump to $10,800 per month ($129,600 pa) and then increase by CPI plus 2% per annum each year for next five years.

We have a liability to carry out a shop fit prior to end of July 2010 which we will either undertake ourselves or we would be willing to discount the business sale by $70K to cover the cost of the refit to the new owner.”

I suspect the $70,000 discount will not cover the total cost of the fit-out. The West article quotes of cases like this with even higher increases in rent and higher fit-out costs ($250,000 to $300,000) and business owners closing down, going broke or moving out as a result of the high costs and demands of the centre management. Many Perth business owners are worried about extended shopping hours coming in, as this will mean another major hike in rent to the shopping centres.

It IS possible to make a profit in shopping centres and you do get the advantage of high traffic, car parking, and security. However, if you are considering a franchise business in a shopping centre and paying these high rents as well as franchise fees – make sure you do your maths first and get good legal advice on the terms of the lease! Do your homework thoroughly before you jump in and make sure your chosen business can generate the cashflow to pay the rent and outgoings (now and with the annual increases), pay franchise fees, pay any loans, pay you a good income and still make a profit. If it doesn’t do all these things – don’t get in to it!

Feel free to contact me through the CONTACT US tab at the top of this page if you are thinking of buying a franchise and want to discuss it first. Until next time!

John Denton

Tips for Business Advisors, Business Coaches & Consultants

September 8, 2010 by John Denton 1 Comment

This is the first in a series of posts for business advisors and business buyers on what to look for when buying a business – over and above the financials. These posts are equally relevant for people selling their business as it indicates areas they may need to work on and areas that affect the value of their business!

There is a tendency for business advisors and consultants (and business buyers themselves) to focus on just the financials of a business; however, there is a wealth of other business information which advisors should understand, in order to properly advise their clients….

I’m not sure how much advisors want to get involved in analysing business opportunities for their clients or how much detail they want to be involved in, so I have written these posts as a series of questions which a buyer needs to ask for himself or have an advisor ask for them.

I’ll begin by setting the context and start with a few definitions.

When I refer to a business I mean a profitable “going concern”. We typically sell “going concerns” in the price range of $200,000 to $10 million. Furthermore, around 99% of the sales we facilitate involve the transfer of assets from one legal entity to another and not the sale of the shares of an entity. This is generally seen as the cleanest and easiest way to do things in the majority of cases and the buyer knows there will be no overhanging lawsuits, tax problems, environmental issues etc. Most buyers want a clean start.

Occasionally, there are situations where it is more advantageous to one or both parties for the buyer to buy the company. Each case needs to be judged on its merit as it can affect tax, stamp duty, transfer of licenses and accreditations, and liabilities and risk. Both parties need to seek expert advice relating to their situation.

In a typical business sale, the assets which the buyer is buying are the plant & equipment, stock and goodwill. In effect, the buyer is buying some tangible assets and a profit stream based upon the past history of the business and the risk against that profit continuing in to the future. The value of the business, therefore, is based upon financial or tangible factors and non financial factors, many of them intangible (for example, goodwill).

In this series of posts, through necessity, I will be talking ‘generalisations’, whilst in the real world every case needs to be assessed on its own merit. There are far too many permutations to be covered in a post like this.

In the next post, we will look at how a business is appraised for sale and what a business is worth?

For details of my next workshop on buying and preparing businesses for sale, CLICK HERE

Regards

John Denton

New! Businesses For Sale Page

October 14, 2009 by John Denton Leave a Comment

Hi Everyone,

Just a quick post to let you know that I have created a new page on this web site for “Businesses For Sale”. It contains the latest listings of businesses for sale at Performance Business Sales.

You can find the Businesses For Sale page under the SERVICES tab at the top of this page.

Best Regards,

John Denton

It Always Amazes Me – Buy A Business

October 8, 2009 by John Denton Leave a Comment

Is it a good time to buy a business?

It’s the end of 2009 and interest rates are on the rise in Oz which suggests that the economy is on the up! How will that affect business sales – well we will have to wait and see. Certainly, right now, the market is pretty buoyant with good offers being made and accepted. So, businesses are selling and it reminds me of something that always amazes me.

Why do people always seem to want to change a winning formula? Even before someone buys a perfectly good business they are asking questions about changing it!

Can I take that product range out and add this one?
Can I stop providing that service and make it this one?
I want a new logo!
I don’t want those staff members to stay on, I want to use my friends.
EVEN – I’m going to change the business name!

All that goodwill and reputation which has been developed can be rubbed out by a new owner in 5 minutes! Why do they want to do that? It amazes me.

Sure, any new owner will want to put his own “stamp” on the business. And sure, there will always be areas where improvements can be made and new potential realised. But at least wait until you have been in the business for a month or two and work out what is working and who’s who in the zoo before making any major changes!

Of course, there are always situations where wholesale changes are required. I know someone who recently bought a “struggling” business which was situated in a brilliant location. So the new owner closed it down, spent 3 1/2 months doing major renovations, changed the name and branding and then re-opened. Still exactly the same kind of business but it needed a major makeover. What the new owner was buying, of course, was the location! Perfectly sound strategy.

Another great tip we can learn from his particular case as well, is that when he re-opened he had a “soft” launch. Why? To make sure that all the systems worked correctly, the staff were trained and knew what they were doing and that they could provide the level of quality and service which would make them a standout. Once everything is tried, tested and proven – then will come the BIG launch. Just good plain SMART business. Not change for change sake!

Until next time! Feel free to comment on this article.

Check out my next 1/2 day workshops on developing a business to make it saleable. Go to the “Workshop Programs” tab at the top of any page or just CLICK HERE.

Regards

John Denton

Read The Damn Documents BEFORE You Sign Them!

September 30, 2009 by John Denton Leave a Comment

Hi All,

As mentioned in the last article I posted, associated with the lack of attention to detail is the reluctance for people to read documents before they sign them. Why don’t they do that?

I think there are a number of reasons! One is the lack of time. Everyone is in a hurry and they may feel pressured to sign rather than spend the time in the meeting ‘reading the detail’. They may feel that taking the time to read everything shows a lack of trust in the other parties and they don’t want to be seen as ‘picky’. Whatever the reason, it can come at a cost.

These are legal and binding documents that are being signed. For example, The Agreement To Purchase comes with pages of “Standard Conditions” which are supplied to both parties ahead of finally signing. They can read them or get a lawyer to read and explain them. In most cases they are written in plain English (ours are at least!). Then there are often several or more “Special Conditions” which get negotiated and agreed between business sellers and business buyers prior to signing.

Even though we spell out the consequences of not meeting many of the terms and conditions – in the euphoria of the business sale (for the seller) and the excitement of becoming a new business owner – people forget.

TIP: Get advice before sitting down to sign ANY document. Know what you are signing and the consequences if conditions aren’t met. Ask for clarification and NEVER ASSUME!

As a seller, you will generally have more than one offer to consider. Make sure you look at any “special conditions” as these may make one offer better than another – in spight of the dollars!

As a buyer, make sure you include any conditions that protect you from post sales blues. Don’t go over the top but cover the major threats to ongoing profitability.

Typically you want to make sure;

Plant & equipment is in good working order. Arrange for an inspection by a technician if appropriate
Meet with employees, suppliers and major customers to make sure they will continue on
Consider a specific Deed Of Restraint on the seller not to compete in the future
Organise a stock take to make sure stock is correct and “saleable”
Agree how work in progress will be reconciled. This is in standard conditions but I often recommend a specific clause detailing the agree handling of this. It can be a contentious issue if not handled well

A good broker will anticipate most things for you and explain everything – but always get a second opinion and READ WHAT YOU SIGN BEFORE SIGNING!

Want more on this and any topic related to buying and selling a business – come to my next workshop, or sign up for my mentoring group! Go to “Workshops” on this web site and select the one for you.

Regards
John
Helping Business Owners Achieve Their Life’s Goals Through Buying and Selling Businesses

And They Wonder Why They Have Problems ….

September 25, 2009 by John Denton 1 Comment

Hi Again,

I can’t believe it is so long since my last article. Things have really taken off since the new financial year started (1st July for the non Aussie readers) in that we are now finally getting genuine business buyers in the market place who are prepared to make realistic and acceptable offers. This is resulting in deals being done and businesses changing hands!

Yeah! We say. But it doesn’t come without some frustrations. One of the most common frustrations is people’s lack of “attention to detail”. In Australia we are famous for the “She’ll be right, mate!” attitude. Unfortunately, when it come to legal contracts and the exchange of large sums of money if “She ain’t quite right mate!” then it can end up costing someone a lot of money, time and stress. And none of us need any more of that.

An example is the legal entity of the seller’s business and the buyer’s business. It’s one of the first questions I ask people. And they tell me it is, e.g. XYZ Pty Ltd. It gets put on to the paperwork and the owner signs the Authority To Act, for example. In spite of repeated questions it turns out later, at a critical time, that there are multiple directors and some don’t want to sell. Or, there is a “trust” involved and the Pty Ltd is a trustee for the trust.This can cause all kinds of complications down the track.

Another trick that gets pulled on us is the incorrect spelling of business names. Over a period of time the owner forgets that they registered XYZ (W.A.) Pty Ltd and not just XYZ Pty Ltd or something along those lines. When I pull them up for it they ask “Well isn’t that close enough?” to which I always answer “If you are one digit out dialing a telephone number, does it really matter?”

Of course it matters!!! And then settlement of the deal gets delayed and people get angry and frustrated and start looking for people to blame. No matter how much as brokers we strive to get the correct information and detail, we are usually at the mercy of the owner’s memory (apart from certain things which can be searched on government databases) – which has often faded with time!

TIP: Always check what you are writing on forms BEFORE you fill it in. And the old adage “NEVER ASSUME” – please!

Next article to be posted will be “Read the damn documents BEFORE you sign!)

P.S. Check out my upcoming workshops in Perth – next one is October 23rd – go to Workshops tab for info.

Regards
John Denton
“Helping business owners achieve their life goals through buying and selling businesses!”

There’s No Accounting For Taste

April 10, 2009 by John Denton Leave a Comment

After my little dummy spit on franchises, I had a client yesterday ask me if I had a fast food franchise for sale as his wife is looking to buy one. Not only that, he mentioned a particular franchise by name. As it happens, I know one of my colleagues has one listed so we may be able to help. And that’s all fine!

However, after getting more information, I suggested his wife look at another business we have listed which would suit her background very well and in my opinion would be a much better match. They are
comparable in price so let’s compare;

Fast Food Franchise
7 days a week
Long hours
Low staff loyalty
Low gross profit
Rely on passing trade
Royalties payable

Alternative Business
5 days a week and flexible
Low flexible hours
High staff loyalty
High gross profit
Loyal niche client base
No royalties

And there’s more ……….

And so it goes on. But the client is still leaning towards the fast food franchise. Why? Because it is perceived as being ‘safe’ and the brand is well known. It comes back to that old sales maxim – sell the client what they want NOT what they need! Either business is a good buy – otherwise we would not have listed and marketed them both. And buyers have THEIR reasons for buying which may not be the same as our own.

Just goes to prove, there’s no accounting for taste!

Regards,

John

Why We Do The Hard Work Upfront

March 30, 2009 by John Denton Leave a Comment

Hi Readers,

Last week I was reminded why at PBS we do all the hard work with the business seller “up front”. You see
I had a conversation with a young man who came to me as a ‘buyer’. I, and some of my colleagues,
showed him a number of businesses. Then, as sometimes happens, it all went quiet and no purchase was
made.

Some weeks later I received a call from someone wanting me to sell their business for them. It turned out
the young man I had been helping had referred this person to me as a reputable broker he should use.
When I rang the young man (buyer) to thank him I asked how he had gone with buying a business.

It turns out he had gone to a different business broking firm and had put an offer in on one of their business
for sale. After spending time and ’emotion’ going through the purchase, it all fell apart in due diligence
because of problems in the financials. The young man put in another offer through that same broking
company only to have this second deal fall through as well.

What this highlighted for me was the strength of our process at PBS and how it protects both the buyer
and seller and minimises the chance of the deal falling through. We get the seller to provide us a lot of information about their business, including finalised accounts, UP FRONT before we do the appraisal. If
things don’t stack up, we don’t take the listing. If we do take the listing, then the next step is the business report and this is such a strict process that all strengths and weaknesses of the business are uncovered
and documented.

By doing the hard work upfront we make it a more successful, lower risk and less stressful process for
both parties.

I thank that young man for reminding why we do the things we do.
Bye for now!

The Ups and Downs Of Franchising

“If I could get out of my franchise …”

Buy A Business – What You Need To Know

I Told You So – Shopping Centres & Franchises

Tips for Business Advisors, Business Coaches & Consultants

New! Businesses For Sale Page

It Always Amazes Me – Buy A Business

Is it a good time to buy a business?

Read The Damn Documents BEFORE You Sign Them!

And They Wonder Why They Have Problems ….

There’s No Accounting For Taste

Why We Do The Hard Work Upfront

Rave Reviews

Testimonials

From Ros Worth – Department of Regional Development

After Andrew Huffer and I ha…