The most important thing you need to know is how you will make money as a franchisee. Does your investment provide a realistic opportunity to earn the income you want or need?
“Some people go into a franchise with the idea that they’ll make the real money from capital gains when they sell. But relying on some future event is madness,” Peter Knight, a business and franchise accountant with Franchise Accounting & Tax says. “You also need to consider that getting a return on your investment as you trade is a way for a small business owner to demonstrate that the business has value, which will increase the chance of a capital gain when you sell. Even then, this isn’t guaranteed. The business must make money as it goes.”
What to look for in the P&L statement
Profit and loss can tell you a great deal about a business. Knight recommends you pay particular attention to certain figures.
Things to compare
- Net profit compared with the prior year. Does this meet your expectations and needs?
- Sales of goods or services, the cost of goods or services, total wages and rent compared with the previous year, both actual costs and as a percentage.
- Gross profit.
Things to check
- Does the wages allocation include a salary for working owners?
- Do superannuation payments meet the minimum super guarantee percentage (SCG) requirements and, if not, why not?
- Are all tax payments up to date? If not, why not?
- Costs associated with repairs and maintenance – do they indicate regular upkeep or might assets be falling into disrepair?
Things to query
- Motor vehicle and travel expenses – are they legitimate?
- Unusual or exceptional items.
- Any ‘one off’ items.
Talk to an accountant
It’s vital that you discuss the figures with an accountant – ideally one with experience in this area.
“An experienced franchise accountant will be able to assess the numbers based on their experience of other franchises they’ve worked with, as well as other business opportunities they’ve come across,” Knight says.