From the desk of Geoff Watson - General Manager I.L. Wollermann Pty Ltd
You don’t have to be a rocket scientist to know that there is an element of risk in any investment, but being smart about investing is being smart about minimising risk.
Risk is unavoidable. Whether you are playing the stock market or buying a business, there are ways to minimise risk and therefore maximise your outcomes. Buying a business is no different from other forms of investment from that point of view. One way to reduce your risk is to buy an existing business that's already demonstrated an ability to successfully operate. That confidence may come at a price as you'll generally spend more to buy a business than to start one from scratch. If you've got access to the funds, though, it's a good option.
While there are no guarantees in business and the risks must always be considered and managed, buying an established business clearly offers significant advantages worth considering if you want to own your own business. In order to buy the right business, you need to investigate its past performance, operations, current status, staff, management, competition, industry and its future potential, all of which is so much easier to do with an existing business.
And just in case the idea hasn’t hit you yet, add franchise to the equation and you might just be entering into a life changing experience.
But before you begin, consult the person in the mirror and ask yourself a few questions:
Are you really serious about buying a business? Every day our team of advisors engage with people who have been looking for a business for “a long time”. If this is you, then maybe you need to redefine your parameters. Remember, the perfect business for you probably does not exist.
Have you seen a business you like? If so, did you make an offer on it? This is a good way to test your courage.
Consider how much you need to earn from a business. Let’s say you invested $200,000, how much would you expect to earn from the business?
How much can you comfortably invest in a business? Consider the asking price of the business and the availability of cash and potential borrowings and current debt you already have. What securities can you provide to a lender?
Who will run the business? Is it just for you or will your partner/family help?
You need to have a serious discussion with anyone else who will be involved, now, not later.
If you have been in business before, what have you learned that will assist you in your next business?
What skills do you possess, and will they help you run your own business?
If you are currently employed, have you definitely decided to leave your job?
Why do you want to buy a business?
What do you see as the main criteria for the business that you want?
How far will you travel to the right business?
If you are still reading this article and have answered the above questions, then you are well on your way to achieving your goal of owning your own business.
I mentioned earlier that there are significant advantages in buying an established business, and further significant advantages in buying into a franchise system. There are many reasons why you should fulfil your dream of becoming your own boss and buying a franchise. The following reasons to buy an existing franchise will help you to understand why it will be a good lower risk investment.
1. There are many “would be” entrepreneurs that have exactly what it takes to run a successful business but don’t have a clue about getting started. Whether it be raising finance, negotiating lease terms or even the confidence it takes to quit their job and start their own business. Buying an existing franchise can often eliminate much of the hard work: finding a suitable location, negotiating a lease with a landlord, hiring adequately skilled staff and doing all this in a timely manner and within your budget. When you buy an existing franchise you are buying a resolution to these hurdles.
2. When you buy an existing franchise location you buy a proven system. All franchises have an established system in place that you must follow. These systems are designed to help you improve the overall productivity of the business and increase the revenue for each franchisee, thereby increasing the chances of keeping the franchise strong. Utilising a proven system can eliminate much of the guesswork a first time business owner may face.
3. When you buy into an established franchised system in an established location, the corporate image and brand is already recognized. Customers are already purchasing items they are familiar with. Trust already exists.
4. When you are considering your purchase, you will require the assistance of your accountant and your lawyer. When buying an established business, you must be given the opportunity to verify certain information. This normal procedure will allow your accountant to obtain the past financial records of the business, so he can perform a “due diligence” on those records to establish the accuracy of the information on which you based your offer to buy business.
5. Banks and other main stream lenders are usually very comfortable financing the purchase of an existing franchise because they already have a proven track record, and will have financed other stores from the same franchise before. Whilst the different banks will from time to time change their preferences for certain franchises due to their current level of exposure, they will usually look at the more successful franchises as having a lower risk of failure and are more inclined to lend money based on that belief. A successful store within a successful franchise has a better chance of being an acceptable risk for the lender.
Geoff was recruited by Wollermann & Associates from another business broking firm in 1999 and was appointed General Manager in 2005.
During the 1980s, he assisted many business migrants settle into Australia, providing financial and investment advice. In a 10-year period he assisted a range of businesses owners to understand their businesses better, particularly in the financial arena, by adopting a simple and understandable approach to business and financial management.