Franchise Accountants: 8 Common Mistakes Buyers Make...and how to avoid them

Having worked with over 1,000 different franchisees over the years, we see people making the same mistakes over and over again. These mistakes are often costly in time, incur financial pain and result in paying more tax. In most cases they can be avoided, so we thought we would share them here.

1. Rushed decision-making

‘Buyer’s remorse – regretting your decision when it’s too late – is often the result of buying a business based on feelings rather than facts. This typically stems from insufficient research, so do your homework thoroughly. Buying a franchise is like buying a house – it’s a significant financial decision; they’re not all the same and the contract is legally binding, so don’t be rushed. 

2. Penny wise, pound foolish

Not seeking independent financial and legal advice when buying a franchise is a common issue, especially with lower-priced franchises. The apparent benefit gained by saving money is soon outweighed by the cost of making avoidable mistakes. One piece of advice can save a franchise buyer thousands of dollars, so seek out advisors with relevant franchise knowledge and experience with the franchise brand you are seeking to purchase. 

3. Ignoring advice

Having got good advice, listen to it. Looking back, we all have examples of decisions we have made which, with the benefit of hindsight, we realise were wrong. The role of the advisor is to give you the information you need to make the right decision at the right time. Accept that, sometimes, the right advice may not be the advice you want to hear.

4. Not doing the sums

We find that financial literacy around buying a business is often low, particularly for first-time buyers. If you don’t find out the numbers that really matter before you sign, how do you know if the business will work for you? At Franchise Accountants, we work around a robust seven-step financial process when evaluating a franchise which informs buyers about what they need to consider before investing. Franchise specialists will also have access to benchmarking information which helps evaluate any particular business.

5. Biting off more than you can chew

Being under-funded – having insufficient capital either to fund the initial purchase of a franchise business or run it on an ongoing basis – is a common mistake. In fact, research tells us it’s the number one reason for business failure. Sometimes, if things go wrong, the franchisor gets the blame when in fact the franchise model is performing properly. It may be that the franchisee bit off more than they could chew.

6. Too much debt

Over-gearing a business with too much debt is another common mistake, often fuelled by over-optimistic sales projections. Getting a loan to finance a business is normal, but note that while a bank may lend you money, the risk is yours. If you load the business with more debt than it can afford to service, it may fall over. Dynamics vary: one franchise business may support 100 percent debt financing while another requires just 20 percent. Take advice to help you get the right balance.

7. Tax matters

Franchisees are all too often unaware of their tax obligations and use the money they’ll need to pay their taxes to fund their business instead. When the tax bills come in, they get a nasty shock, which is why failing to pay taxes is the second most common reason that business owners fail.

This can relate to a number of tax types, including GST, NRWT, FBT, PAYE and Provisional taxes. Having the right knowledge, skills, software and systems in place to comply with your tax obligations right from the start is critical to any business. Ignorance is not an excuse as far as the Inland Revenue is concerned. A new provisional tax method called AIM (accounting income method) can help business owners to pay their tax as they go and not get behind, so ask your accountant if it is right for you.

8. Not following the system or business plan

A franchise is often built around a proven business model, so one of the critical success factors for franchisees is following the processes, procedures and know-how that others have tried and tested for you. Thinking you know better, or seeking short-cuts, frequently leads to trouble – and may even lose you the franchise. So listen to the counsel of your franchisor and leverage their experience and that of your financial advisors to create a business plan that will enable you to get the most out of the opportunity and suit your own goals.

conclusion

By avoiding these common mistakes, you’ll greatly increase your likelihood of building a successful and rewarding franchise business. Working through a robust process of evaluation with franchise-experienced advisors can assist in preserving your capital, assessing risk versus reward and minimising borrowings and tax.  

This advice is of a general nature only and expert advice should be sought to get the right advice for your specific situation.

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