While surviving the pandemic seems like a surefire sign of resilience, our experts suggest there are specific points to consider that can help determine whether or not the business is viable in the long term.
How do weekly sales numbers compare to pre-Covid numbers?
With all the uncertainty of the past two years, it’s no surprise that “resilience” is now high on the checklist of many potential franchisees.
There is no substitute for reviewing and testing financial information, especially with the help of your professional advisor. However, there are some basic questions that can be asked of existing franchisees early in the process to gain valuable insight.
Ask them how their weekly sales numbers have held up over the past two years compared to pre-Covid levels. It’s also worth asking them how the company was doing in the two years before Covid. Some businesses were marginal as the pandemic approached and may have survived only because of the range of support programs and packages on offer. Questions regarding franchisor support, customer behavior, impact of competitors, and effectiveness of marketing campaigns can provide additional insight.
The next step would be to survey what their recent experience has been with major business expenses (stock purchases, salaries and rent, etc.). More importantly, try to find out what they think is causing these changes. For example, difficulties in obtaining inventory in a timely manner, difficulties in recruiting or retaining staff, and problems with landlords.
Taken in isolation, these responses don’t reveal much, but when consistent themes emerge, the picture can become very clear very quickly.
Darryn McAuliffe, CEO, FRANdata Australia. Darryn has over 30 years of experience in corporate banking, risk management and franchising. FRANdata researches, reports and evaluates franchise systems.
Verify necessary licenses, permits and debt commitments
Franchisees should ensure that their franchise attorney reviews franchise documents. The attorney should highlight any red flags regarding the franchisor’s financial performance over the previous two years. It is also important to look closely at the recent history of franchisees who have left. These details tell a story about whether or not the franchise system is healthy.
A brand new business is of course more risky than an existing business that has a proven track record. For an existing business, consider the following:
If there is a lease, review the terms of the lease and the rent review clauses. Has the landlord given rent relief during lockdown periods? When is the next market review? There is a risk that the rent will increase at that time and have a significant impact on your profit.
Make sure that all business assets you acquire are debt-free. Your lawyer can do a PPSR (Mobile Security Registry) search to ensure that there is no registered security interest in the company’s assets
Verify all necessary licenses and permits for the business and all vendor agreements are up to date. Check that the terms are commercial.
BBuying a business involves risk, but you can reduce that risk by getting expert legal and financial advice before you commit.
Robert Toth, Special Advisor. Robert is an Accredited Commercial and Franchise Lawyer named as one of Australia’s Leading Franchise Lawyers by Who’s Who Legal 2021.