Paul and I were interviewed by Gill South of The NZ Herald a couple of months ago and she published a piece regarding redundancies/ex-pats buying businesses rather than seeking employment, (seen here: Gill South Article NZ Herald) and I thought it might be a good idea to expand on that article a bit. I quoted statistics in last week’s blog that over 50% of companies have let staff go in the previous 3 months or will in the next 3 months. Are people that are being made redundant receiving redundancy payments? A very real question in our current climate. Most redundancy clauses in employment contracts that I have seen state that in the event of a redundancy there will be no payment, but it seems there are payments in the higher echelons of larger companies. I remember in a previous life when I sold only franchises that the Police “perfing” was all the rage.

Redundancy, return of ex-pats and the lack of demand for high end consultants all seem to be pointing cashed up and highly qualified potential purchasers towards self employment. New Zealanders have a real awareness of self employment so if you have been made redundant (especially more than once), are returning from a beneficial exchange rate employment or have been a corporate warrior/corporate consultant which way do you go? There are obviously benefits and risks associated with all three and I will try to outline my thoughts below, and what anybody in this position and agonising over which way to go might want to look out for.

Franchise opportunities

Mention the word franchise to most people and they will generally have a hard and fast opinion on things. There has been a lot of negative press in recent years regarding the franchise industry, most of it pretty fair, but damaging to all systems fair or not. I would be the first to admit that there are a number of crap franchise systems out there but lumping them all together is like saying a Trabant is the same as Ferrari because they are both cars.

The most important statistic for the Franchise Industry that any prospective purchaser would want to know is that the survival rate for franchise units in the danger period of the first three years is 94%. This should give some comfort to any purchaser. My thoughts on what a good prospect for a franchise system would be as follows:

• A first timer to business. Franchising offers the support required for a fist time owner to grow into self employment.
• A team player. Franchise systems offer a new owner the opportunity to be part of a team. But also this means you have to be ok working in your territory and be a good neighbour to the franchisee that borders yours.
• Self starter. Like any business you need to be able to get out of bed in the morning. Good Franchise systems will show you how to get business but you are the only person who can make your business successful.
• Not too entrepreneurial. Good franchise systems want their franchisees to follow the proven systems. Adding a personal touch is accepted and encouraged but a full blown entrepreneur will become frustrated and destructive.
• Accept that you aren’t absolutely in charge of your own destiny. There is a contract that you must adhere too, a system you must follow and an identity you must portray.

I always thought there were three distinct results for people buying a franchise:

1. Franchisees that love the camaraderie and stay in the business for a long period of time.
2. Franchisees that learn how to be business people and exit within 3 years and set up a business for themselves.
3. Franchisees that hate the fact that that they are not absolutely their own boss. Don’t like the restrictions of franchise ownership and exit within 18 months.

The key to a successful purchase of a franchise business is a careful due diligence investigation. An investigation not only on the franchise system, the franchisor but also on yourself as to whether you are a suitable candidate for this type of business ownership. I would recommend talking to Daniel or Dean from the Westpac Franchising Team at 0800 177 007.

Start-Up

Start-ups are obviously a riskier proposition than a franchise business and/or an existing business. It offers you the opportunity to absolutely be your own boss but can also be a lonely road to hoe. There is a lot of support offered these days to start up businesses especially from the banks that all seem to have their own support packages. Also there are business to business groups, Chamber of Commerce and a newer trend towards incubator institutions that should all be investigated.

Statistics show that 4 out of 5 new businesses see out their first year. In the 2001-2007 period: 79% survived their first year, 66% the second, 57% the third, 50% the forth, 45% the fifth and impressively 40% the sixth. So it is not all doom and gloom for start-ups. Stats can be seen here: New Zealand Business Demography Statistics: At February 2008

To start a company from the ground up you have to be extremely self motivated, very entrepreneurial, a great networker and have good all round general business skills.

Again Due diligence here is the key. Does the idea have legs? Talking to all the groups mentioned above before you set up, to get external opinions on feasibility, would be recommended. Also a good team of professionals will enhance your chance of success adding the experience that you might lack.

Existing Business

The transition from the existing owner is always the challenge to any ownership change. Dealing with an experienced broker will ensure that your needs in relation to the transition are documented on the Sale & Purchase agreement. A well instituted “Vendor period of Assistance” offers a new owner an excellent opportunity to pick the brains of the outgoing owner and in conjunction with a quality DD investigation should give a new owner an excellent chance of future success. Also don’t be afraid to ask the exiting owner to stay on longer in a consulting role. If you are negotiating with a business owner who is reluctant to offer you a decent period of assistance or you believe might not live up to their obligations in this respect, walk away it is not worth the risk.

Now an existing business is going to be the most expensive initially of the three options but in most cases will be the only one already making money. This is an important consideration but you will be paying the exiting owner “goodwill” for the work he/she has put into the business to get it to this point. This doesn’t sit well for some people and if you are one, then a start-up is most likely for you. Would I recommend one over the others? The answer would be no, not without knowing what you as a potential purchaser would bring to the party. The different types of businesses appeal to the skill-sets and mind-sets of different people so making a generalisation would just be irresponsible. Doing the hard yards in a Due Diligence investigation on the business, its future prospects and introspectively on your suitability for that business and/or business type will offer you the best chance of future success.