When you buy a business there are some essential questions to consider about the the level of investment and what you get in return.
A key question is about the payback period and how long will it take you to recover your investment (ROI).
Breaking even is the first step in the business, but to succeed and achieve your goals the franchise needs to be turning a profit within a reasonable time.
Understand the costs
What are the running costs of the franchise? Consider the fixed overheads – business loan and vehicle lease repayments, equipment, wages (including your own) premises and utilities.
The variable ‘cost of sales’ will reflect what it costs to make a sale, including materials or ingredients, perhaps fuel. Other variable costs include advertising and training, the elements you need to promote and sustain your business.
It is advisable to break these costs down over a year into monthly increments.
Can you afford the repayments
What about working capital? This is the money necessary to keep the business running before the franchise delivers the profits required to fund itself and your wages.
Consider the borrowing or loan arrangements required, and if you can afford the repayments. The current succession of interest rate rises is a reminder that unexpected soaring repayments can really take a bite out of a business.
Think about the working capital requirements of the new business, and the rate of expected business and profit growth – will these match the repayment commitments?
You can also consider what alternative borrowing or loan arrangements are available.
Understanding the relative financials is an important aspect of comparing potential franchise purchases.