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Melbourne, Australia

Is the cost of the franchise realistic?

By Tim Kilham, Lanyon Partners Chartered Accountants

As a generalisation, my view is that people selling businesses ask too much for the businesses and as a result people buying businesses often pay too much for businesses. In the ideal situation you would like to be one of those buyers who sells for too much but doesn’t pay too much!

The first thing to realise is that the asking price is probably not what the seller of the business truly expects to receive and that the price is negotiable. This may seem obvious to most people – for example, we all know that when someone is selling a property the price is negotiable – but for some reason many purchasers I deal with seem to think the price of businesses is not negotiable.

A good starting point to work out whether the price is realistic is to find out what other franchises in the same system, or franchises in a different system but in a similar industry, have sold for. The difficulty of course with this is that no two businesses are identical – they will have different locations, different customers, different sales levels, etc. Often though in a large system you can find similar enough franchises to ensure you are comparing like with like.

It sometimes helps to have a discussion with the franchisor. Generally, a franchisor does not want to be, and should not be, involved in the sale of a franchise from one franchisee to another. However, I have known franchisors to have a quiet word to say when it is clear that the price being asked is totally unrealistic, because it is not in the franchisor’s interest to have franchisees buy into business at too high a price – both franchisor and franchisee suffer as a result.

If you are dealing directly with the franchisee and are not dealing with a business or franchise broker, talk to a business or franchise broker. If you are dealing with one business and franchise broker, talk to another one broker who is not selling the business. It is these brokers’ jobs to buy and sell businesses and they have a good idea of what a business is worth and what the market is paying.

You should also talk to an accountant who has experience with the buying and selling of businesses, particularly franchise businesses. There are rules of thumb that an accountant can help you to apply to help you work out whether the asking price is realistic.

You do need to establish what the true profit of the business is, not what is reported to you. Profit might be understated because not all sales are recorded (but how do you satisfy yourself about this fact?) but profits are often also overstated because not all expenses are listed in the documents given to you. You may also need to include things such as interest, depreciation, finance charges and owners’ salaries which may not be included in the numbers given to you. So make sure you know what the sustainable profit of the business is – the profit that you can make from the business – because that will have a major bearing on any decision as to whether the cost of the franchise is realistic or not.

In summary, if you know what the true profit of the business is going to be, then by finding out what similar franchises are selling for, and by talking to experts such as the franchisor, other franchisees, business brokers and accountants, you should be in a position to establish whether the cost of the franchise is realistic.

Finally, when the time comes to make an offer don’t be afraid to put in a really low offer – the seller might be insulted, the seller might say no, but you might also find out what the true asking price, and therefore realistic price, is.

About Tim Kilham
Tim is a director of Lanyon Partners Chartered Accountants and heads up their franchising division. Tim has provided advice to, and acted for, many franchisees and franchisors, and is particularly active in advising on the purchase and set up of businesses.
Phone 03 9861 6140
Email: [email protected]