Pre Purchase Review
Buying a franchise is a big decision and there are a number of things you need to consider really carefully. If you’re putting your own money on the line you’ll want to make sure that you’ll get a decent return on your investment. If you’re borrowing money it has a double whammy. Not only do you have to get a return on your investment after paying the interest, but you still have to be able to pay back the loan!
This is where a pre purchase review can help. Essentially, this is a review of the financial aspects of the franchise you’re looking to buy. It’s critical to make sure the numbers stack up. The key things a pre purchase review will tell you are:
- The level of sales you need to achieve to earn a decent living
- How much you need to pay your bills
- An overview of the total costs of the business
The pre purchase review provides a summary of your initial costs to get into the franchise and the costs to keep it running each month. It then outlines the level of sales you will need to cover these costs and make a decent living. Without these figures you will be flying blind, with no clear sales target to aim for.
In our view, a pre purchase review forms an integral part of your financial due diligence. Financial due diligence is where you consider all of those areas which have a financial impact on the business.
Risks and Funding Considerations
A thorough pre purchase review should also cover several other important areas you need to consider before you buy. It will:
- Look at the risks of owning the franchise. This is really an important area to consider and has been flagged by the Franchising Code of Conduct,
- Recommend the most appropriate business trading structure to use, once your personal and financial circumstances have been considered.
A pre purchase review will set up the next stage of your decisions, such as the best trading structure to use and the best way to structure your finances.
It’s critically important for you to be aware of these things from the beginning. That’s because the way things are set up at the start can have repercussions down the track. If it’s not done right, you might be up for significant costs in the future.
- For instance, the way your trading structure is set up has a major influence on the capital gains tax you pay when you sell the business later on.
- The way your loan is structured is equally important. It’s essential for your finances to be structured in the most appropriate way, to line up with your franchise agreement and rental obligations.
The Pre Purchase Review follows a standard approach and is typically done for a fixed fee. This means there are no surprises regarding costs.
As you can see, a pre purchase review is a critical component of your financial due diligence.