Getting to Know Your Numbers

The changing economic scenario offers diverse business opportunities and has, in many ways, forced many of us to relook at what we want for our lives. We are seeing many companies and even the bigger corporates realigning their strategies and making vast changes to their business structure. Franchising is one of them and it is fast gaining ground as a vital and stimulating force in our Malaysian economy. It can be a great way of providing you a successful business venture with a secure future – if its uniqueness is understood clearly and its practices implemented well.

An attractive feature of franchising is that the business model is based on a tested and proven track record before the franchisor offers it to would-be franchisees, based on the existing statutory guidelines and requirements.    Another significant feature of investing in a franchise business venture is the availability of various financing facilities, through the local financial institutions, in line with our government’s encouragement to increase entrepreneurship through franchising.

As with any new business venture, an entrepreneur keen to get into the franchising business has to do his/her “homework” by studying and analysing all aspects of the business model thoroughly. First and foremost, he or she must have the motivation to take up the challenge and the determination to succeed.

Evaluating A Franchise Business
There are two important aspects to be considered in evaluating a franchise business – the qualitative aspect and the quantitative aspect. The qualitative aspect refers to products and services that you can see and feel. The product or service should be appealing to you and you should be interested to get involved with it. Why bother selling or handling things you don’t like? And that is the whole idea of being your own boss. Do you like dealing with clients or customers of the product or service that you are planning to sell? If you have the knack to handle high-end customers, then you can consider taking on a high-end franchise product or service. You should be honest about your own strengths and weaknesses and about your likes and dislikes.

Investigate and plan every aspect of the business, including management structure, practices and requirements, at both the franchisor and franchisee level. Operational considerations such as operating hours, i.e. normal working hours or in the case of food and beverage business you may be required to operate certain minimum hours all seven days of the week or operate 24/7, depending upon location. With regard to marketing and promotional aspect; find out if you have to do hard selling or soft selling with a personal touch.

The quantitative aspect which makes or breaks the choice that you would want to make is obviously the financial consideration of the franchise business. Can you afford the start-up cost of the business? The start-up cost consists of two elements.

The first element is the intangible cost which consists of expenses incurred towards registration of the business and related statutory requirements, franchise fees, licensing fees, deposits for rental and utilities, legal fees for franchise and tenancy agreements etc. The second element is the tangible cost, involving the actual physical set-up of the business such as stock or inventory, fixtures and fittings, along with renovation works and interior decor of the outlet or business premise. Last but not least, the working capital that you need to sustain the business until it becomes operational and is able to meet both its fixed and variable expenses.

Understanding Finance
Cash flow is the lifeline of any business. No business can survive without cash coming in to pay off its operational overheads, such as payment of rent, utilities, salaries, replenishment of stocks and other regular expenses. Cash flow management is crucial and must never be relegated to the back burner. Like any other business, franchise business has its own seasonal peaks and valleys and therefore it is imperative that potential franchise owners manage this aspect of the business extremely well with utmost caution and care.

Some franchise systems provide the accounting system together with the Point-of-Sales (POS) system. The accounting system is the database for all accounting records and the POS system records all sales as well as the inventory movement and status. Regardless of the availability of these systems, a most important consideration is the meticulous effort to maintain regular and up-to-date record keeping of all transactions of the business so that you will be aware of the financial position and status of your business at all times. This will ensure that there is no disruption to your business and it will give you the confidence to achieve the desired results.

You should also be well versed with the Balance Sheet of your business. It is the financial statement that tells you what you own versus what you owe and what your business is worth after paying off all the debts. At the end of the franchise term you surely would want to ensure that you are worth more than what you had invested in the business.

In deciding if a franchise business is worth to invest in, ask yourself the following questions:

1. Is the Return on Investment (ROI) for the business far better than if I were to put my money somewhere else for the same effort and the risk that I undertake?

2. What is the payback period? Simply put, how soon can I get my money back?

3. If I were to borrow money to partially finance the business, will I be able to pay back the loan or the financing facility that I have taken whilst at the same time will I be able to make adequate returns from the portion of money that I put in as my equity?

At the end of the day, after having done all the “homework”, are you convinced about the franchise business you want to start? Is it a good proposition and do you believe in your ability to succeed? If the answer is yes, then go ahead. There is no such thing as a risk-free business venture; be it a franchise business or your own start up. What is important, regardless of the choice of franchise business that you want to undertake, is that you must be satisfied and happy with what you want to do and achieve. Life is precious. The time, effort and money that you put in your business are truly valuable. The franchise industry is big and has great potential for entrepreneurs with passion and the right attitude to succeed. If you have what it takes, you are most welcome to make it big in the franchise industry.

Norbaini Hassan is the Managing Director of Aqalivista Consulting and Services Sdn Bhd. She has more than 15 years of experience in the franchise industry as a banker financing franchise businesses and a consultant developing franchise systems for a wide range of sectors including health services, retailing, education, ICT and food & beverage industry. Aqalivista offers other services including business process mapping and reengineering, organisational design, as well as strategic branding consultancy. They are also a training provider for MNCs and GLCs in the private sector, as well as government ministries and agencies.