Ever thought of buying a franchise?

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 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.

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 shown.

“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 at 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 lives. 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 is 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 will be able to afford the bills if you have a few quiet months. If the bank says no, they’re usually doing you a favor.

“The number one reason franchisees do not 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.

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