# Buying an established business or franchise



## young-gun (14 March 2013)

Morning all,

Just wanted to pick the brains of business owners, past or present. I have recently been looking for small business opportunities. Aiming for something that is fairly self sufficient, has a small amount of good staff(and manager) already in place, that requires maybe 10-15 hours a week of my time. Looking for a passive income with potential for capital growth.

I won't bore you with the details too much, but just wanted to get some ideas as to what to look for, what to expect, things to be aware of or watch out for. Has anyone had some terrible experiences? Or any great experiences? Does anyone have certain industries they would stay away from?

Would anyone recommend using a business broker? Or do they only have their interests at heart. I understand I would require a good accountant(already got) lawyer and banker. Is the aim of the game to go through everything with a fine tooth comb so as to eliminate(or at least try to) any potential surprise expenditures etc, and ensure the business has been profitable the past 3-5 years?

Not taking the leap in the immediate future, just starting to get my head around it all.

Cheers


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## Country Lad (14 March 2013)

young-gun said:


> ................Looking for a passive income with potential for capital growth................ I understand I would require a good ........ banker.




The other questions will be reasonably straight forward as long as we know what it is you are broadly looking for.

How much passive income as profit before tax?
Why the need for a banker rather than a bank account - are you looking to borrow to buy the business?  Roughly what proportion of the purchase price assuming it is say in the order of $400,000 including stock?

Cheers
Country Lad


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## young-gun (14 March 2013)

Country Lad said:


> The other questions will be reasonably straight forward as long as we know what it is you are broadly looking for.
> 
> How much passive income as profit before tax?
> Why the need for a banker rather than a bank account - are you looking to borrow to buy the business?  Roughly what proportion of the purchase price assuming it is say in the order of $400,000 including stock?
> ...




My aim is to acquire something that requires very little maintenance, so I can continue working. A couple of examples I have been looking at (but most certainly not limited to) are things like

 - Internet Kiosks, relatively cheap to set up, but location would be everything. there would also be alot of ups and downs I imagine. Very low maintenance, and if one computer is down there are others still ticking over. I think they range from 50k up, I'm unsure of the returns.

 - 24 hour gyms - I think there is quite a good opportunity in these. They require quite a large initial capital outlay. However they are very easy to run. They require one manager for mornings and evenings. There is no food to handle or order. There isn't a great deal of customer contact - meaning less potential for complaints and loss of clients. Just maintenance/replacement on equipment, re-upholstering benches, things of that nature. You don't need to keep track of stock. These gyms are every where now, so it would be important to locate an already established gym with a solid amount of members. From what I have read a setup would cost around 500-700k for a large gym. say you have 1000 members that would be 40k/month turnover. less loans, insurances, taxes, maintenance, wages, franchiser payment etc. I don't know what the profit would come out at but I would think it would be reasonable.

Still got a lot of research to do so I can't give any hard figures, was more just trying to stimulate a conversation regarding owning or starting a business to try and gain some knowledge from those already doing it. And yes I would be borrowing to buy. Unless it was a business for around 50.


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## boofhead (14 March 2013)

Do you have access to past issues of Money Magazine? Maybe at a library or something. I know they have had a feature article on franchises. They looked at a few different models and various issues relating to them. I have a feeling it was from an issue in the last 2 years.


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## McLovin (14 March 2013)

young-gun said:


> - 24 hour gyms - I think there is quite a good opportunity in these. They require quite a large initial capital outlay. However they are very easy to run. They require one manager for mornings and evenings. There is no food to handle or order. There isn't a great deal of customer contact - meaning less potential for complaints and loss of clients. Just maintenance/replacement on equipment, re-upholstering benches, things of that nature. You don't need to keep track of stock. These gyms are every where now, so it would be important to locate an already established gym with a solid amount of members. From what I have read a setup would cost around 500-700k for a large gym. say you have 1000 members that would be 40k/month turnover. less loans, insurances, taxes, maintenance, wages, franchiser payment etc. I don't know what the profit would come out at but I would think it would be reasonable.




You forgot rent, which will probably be somewhere around $300-$350/sqm, unless you plan on your gym being out in the sticks, which a franchise operator may not allow you to do. They like their gyms to be in and around shopping centres retail precincts so that they can get good foot traffic. So what's a "large" gym, 600-700sqm? At $300/sqm that's around $180k in rent, or $15k/month

Then you have to buy your franchise and all that expensive gym equipment that gets abused by untoughtful members. $500-$700K. You intend to borrow this money (This is where it gets hypothetical because I'd be surprised if you can get a loan for that amount without residential property to secure it but anywho. Also bear in mind a lot of franchises don't allow franchisees to use debt; it's not good for the brand when franchisees are constantly going broke). Take the midpoint ($600k) and say you have to tip in $120k of your own money as a deposit. Your interest rate will be at nosebleed level, for example



> Business Advantage Unsecured Index	10.16% p.a.




So you'll be paying a little over $48k in interest. Of course the bank will also want its back and will want it back fast. So they probably will give you at most a 10 year loan...That works out at about $6,350/month. 

So there you go, more than half your membership fees have just gone on rent and loan repayments and you haven't paid your staff, insurance, electricity, maintenance, franchise fees. Most franchises are designed so that people can "buy themselves a job". Those who are buying rarely look at the % return they earn on their investment, it is likely to be well south of the cost of your debt financing. If you intend to work somewhere else then any "profit" you might have made will go up in a puff of smoke.


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## young-gun (14 March 2013)

McLovin said:


> You forgot rent, which will probably be somewhere around $300-$350/sqm, unless you plan on your gym being out in the sticks, which a franchise operator may not allow you to do. They like their gyms to be in and around shopping centres retail precincts so that they can get good foot traffic. So what's a "large" gym, 600-700sqm? At $300/sqm that's around $180k in rent, or $15k/month




if 600-700sq is considered large then I must have meant more of a small to mid. my local is probably 200-250sq, which would cut that by half lets say.




> Then you have to buy your franchise and all that expensive gym equipment that gets abused by untoughtful members. $500-$700K. You intend to borrow this money (This is where it gets hypothetical because I'd be surprised if you can get a loan for that amount without residential property to secure it but anywho. Also bear in mind a lot of franchises don't allow franchisees to use debt; it's not good for the brand when franchisees are constantly going broke). Take the midpoint ($600k) and say you have to tip in $120k of your own money as a deposit. Your interest rate will be at nosebleed level, for example




All the cost of doing business. And yes you are right, obtaining finance for this would be very difficult. This is the thing that annoys me. You need money to make money, and Ill be damned if im going to buy a house now and sit on it for 20 years to access the equity. I spoke to 2 business lenders today and they really are very tight when it comes to these types of loans. 

I dont know that your statement about franchisers not allowing franchisees to purchase with debt is all that true. A lot have accredited lenders to get people into business. It would be rare people have 600k cash sitting there wanting to buy a gym I would imagine. Even if secured by an RP the place can still go bust.





> So you'll be paying a little over $48k in interest. Of course the bank will also want its back and will want it back fast. So they probably will give you at most a 10 year loan...That works out at about $6,350/month.




A mate of mine was showing me a loan application on his phone the other day, I think it was westpac, offering 9.6% unsecured for 500k. Would have to shop around naturally. I'd say it would be cheapest and safest to go with the accredited bank, in fact the franchiser most likely stipulates you must finance through bank xyz.



> So there you go, more than half your membership fees have just gone on rent and loan repayments and you haven't paid your staff, insurance, electricity, maintenance, franchise fees. Most franchises are designed so that people can "buy themselves a job". Those who are buying rarely look at the % return they earn on their investment, it is likely to be well south of the cost of your debt financing. If you intend to work somewhere else then any "profit" you might have made will go up in a puff of smoke.




Majority of franchises I would totally agree with you. This is just one that stood out to me as having potential to not work there. You only require one manager for the whole place, and they don't even pull 40 hour weeks. I'd say they are paid around 35-40k.

Anyway valid points you raise, and points worth thinking over, that's the whole reason I started the thread.

Cheers


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## So_Cynical (14 March 2013)

young-gun said:


> - 24 hour gyms - I think there is quite a good opportunity in these. They require quite a large initial capital outlay. However they are very easy to run. They require one manager for mornings and evenings. There is no food to handle or order. There isn't a great deal of customer contact - meaning less potential for complaints and loss of clients. Just maintenance/replacement on equipment, re-upholstering benches, things of that nature. You don't need to keep track of stock. These gyms are every where now.




Just thought i would mention a recent phenomenon i have observed the emergence of.

The Mini Gym...Just like a big Gym only smaller with only maybe a dozen machines located in a typical sized shop in the suburban shopping strip, the 2 i have noticed were set-up in outer city suburbs and typically in the harder to rent type shops, so rent would be lower and set-up (machines) would be cheaper.

Just a thought.


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## againsthegrain (14 March 2013)

Automated car washes are a good business, when I was looking a while ago they were selling for quiet a bit 700k+. The add was saying it b can bring in 20 - 30k per week in summer.

Not sure about expenses apart from rent, maintenance.

I think its a hard market to get into as its expensive but very good passive income once its up and running


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## skc (15 March 2013)

young-gun said:


> if 600-700sq is considered large then I must have meant more of a small to mid. my local is probably 200-250sq, which would cut that by half lets say.




Are you sure you can attract 1000 members in such a small spot? 

Anyway, I think one of the simplest franchise to get your feet wet is vending machines. You can start quite small and build it up as you get more comfortable. And if it doesn't work out you should hopefully not lose too much, and you'd learn a huge amount of knowledge about franchising. I don't know about their returns but I am sure there are plenty of franchisers who would show you.


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## RandR (15 March 2013)

At a bear minimum you need 30%+ to secure a business loan for what your looking at young gun. In either cash or resi property equity. So you can forget about anything with a larger purchase price then that. You know it doesnt take 30 years to  build that sort of equity 

I too really like the idea of purchasing private business, whether it be franchise or whatever, spend a bit of spare time every now and then snooping at deals on seek business http://www.seekcommercial.com.au and www.realcommercial.com.au because I also really like looking at potential commercial property deals.

Ultimately all of the best deals for franchise/business/commercial property just take a lot of equity/cash. So i'm probably about 10 years away from being able to put together anything.


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## young-gun (15 March 2013)

So_Cynical said:


> Just thought i would mention a recent phenomenon i have observed the emergence of.
> 
> The Mini Gym...Just like a big Gym only smaller with only maybe a dozen machines located in a typical sized shop in the suburban shopping strip, the 2 i have noticed were set-up in outer city suburbs and typically in the harder to rent type shops, so rent would be lower and set-up (machines) would be cheaper.
> 
> Just a thought.




Interesting idea. I haven't seen any of them up here in brisbane, not that I am travelling through suburbs all day either. You would be very limited in the amount of members you could hold I would imagine, but as long as its bringing in the dough I guess it doesn't matter.



againsthegrain said:


> Automated car washes are a good business, when I was looking a while ago they were selling for quiet a bit 700k+. The add was saying it b can bring in 20 - 30k per week in summer.
> 
> Not sure about expenses apart from rent, maintenance.
> 
> I think its a hard market to get into as its expensive but very good passive income once its up and running




They are a very good business. I actually new a guy who built one of the first(that I saw in brisbane north) fully automated car wash. He still had a guy at the start with a gurney, and the same guy would towel down the car  - if you paid for it. I wired up another fully automated car wash an an apprentice, this was large scale though, had capacity to wash hundreds if not thousands of cars a day easily. Attached to it was 5 wash bays also, when I drive past they are often full, the automated one not so much. I think it was quite expensive though, talking 3 mill+.

I don't own a 4wd so I'm unsure, but there may be money in 4wd detailing close to camping and 4wd hot spots/islands?



skc said:


> Are you sure you can attract 1000 members in such a small spot?
> 
> Anyway, I think one of the simplest franchise to get your feet wet is vending machines. You can start quite small and build it up as you get more comfortable. And if it doesn't work out you should hopefully not lose too much, and you'd learn a huge amount of knowledge about franchising. I don't know about their returns but I am sure there are plenty of franchisers who would show you.




I did a quick walk out of it this arvo. it may be more 250-300. but no more, and I'm certain that it has over 1000 mems. maybe 1050? Every 100 mems you bring in ads another 40k revenue per annum. I'm open to all possibilities so I'll check out vending machines, ya never know. Ultimately I wanna be the one selling the franchises



RandR said:


> At a bear minimum you need 30%+ to secure a business loan for what your looking at young gun. In either cash or resi property equity. So you can forget about anything with a larger purchase price then that. You know it doesnt take 30 years to  build that sort of equity




Haha well thats because our views on where aussie RE is heading differ substantially I'd rather save the cash than build it through a house at the moment.



> I too really like the idea of purchasing private business, whether it be franchise or whatever, spend a bit of spare time every now and then snooping at deals on seek business http://www.seekcommercial.com.au and www.realcommercial.com.au because I also really like looking at potential commercial property deals.




I looked into commercial properties around my area. Turned out it wasn't a very viable option. Again because I would be starting out at the bottom of the ladder the options are terrible. I think that whole small individual shed thing has been so over-cooked it's not funny. if you wanna make cash you need to step into tech/a's shoes, buy a half acre block and throw up 10 tinnies. Again I don't have the cash for that, nor will anyone give it to me haha.

I like the idea of franchises. Ok sure I am paying someone indefinitely for a business opportunity, but you are essentially paying for an education and invaluable experience in my opinion. If I went in blind into something without any sort of support, I would likely fall face first. At least it's in the franchisers best interest to ensure you are knowledgeable and will help you to succeed.(Or so I am led to believe).



> Ultimately all of the best deals for franchise/business/commercial property just take a lot of equity/cash. So i'm probably about 10 years away from being able to put together anything.




Too right, but I refuse to wait that long. Ill find a way.


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## Andrew Stern (10 April 2016)

young-gun said:


> Morning all,
> 
> Just wanted to pick the brains of business owners, past or present. I have recently been looking for small business opportunities. Aiming for something that is fairly self sufficient, has a small amount of good staff(and manager) already in place, that requires maybe 10-15 hours a week of my time. Looking for a passive income with potential for capital growth.
> 
> ...




If you would like to acquire a business you should definitely visit business-asset.com. You can choose country you want and see what kind of business they have with detailed description. It's a great place to start.


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## Value Collector (10 April 2016)

*Re: Buying an established business or franchis*

Dry cleaning and laundry service can be a good business in the right area and the right staff.

But to be honest, if you are looking to put $500k into a business looking for capital growth and passive income, I don't think you can get better than a share portfolio, a portfolio of 6 listed companies is the ultimate Passive business investment.

Most of the businesses mentioned will produce income (if you are lucky), but face significant risks, and not much chance of capital growth, unless you own the property or expand the system which makes it less and less passive as running multiple units takes more effort from you.

However a portfolio of good companies will produce less income initially, but it will produce less headaches, and also a better chance at capital gains, income should also growth steadily over time.

-----------------

To me the business I owned, was just a place of employment where I could work hard and all the profits rolled into to me, allowing me to earn more than I needed to live on, so I could divert a chunk of monthly income into building up a property and share portfolio.

The share portfolio has been the star performer which has set me up for life, the business was offcourse extremely helpful by generating excess cashflow that could be used for investment, but the real key was diverting the cashflow into other investments.


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## fraa (10 April 2016)

Similar to the OP I am interested in this area also.

Anyone know of any online communities/forums (like aussiestockforums is to equity investing) around development of small businesses ?

Thanks in advance


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## systematic (10 April 2016)

http://www.flyingsolo.com.au/ has forums as well http://www.flyingsolo.com.au/forums/index.php


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## luutzu (10 April 2016)

fraa said:


> Similar to the OP I am interested in this area also.
> 
> Anyone know of any online communities/forums (like aussiestockforums is to equity investing) around development of small businesses ?
> 
> Thanks in advance




If you're interested in becoming a passive investor, why in the world would you invest in a micro business?

Passive investing is define as you writing a cheque with a few zeroes; the owner/s sign a piece of paper that said you own it; then they send you reports now and then; hopefully with dividends here and there. Right?

You could do that, and better, by buying (a share of) publicly listed companies. 

I mean, if you think you can't trust those guys at public corporations... I wouldn't be betting my life savings on the other bastards doing it privately either.

That and there's not enough diversification owning small private business to reduce the risk of business cycle, industry decline; fire breaking out; bad/corrupt management.

I personally would only own private businesses if I run it myself or have a very heavy hand in its operations; to own it passively I'd put it into the stock market.

The analysis and valuation of both are the same... just with the stock market, you could get lucky and buy great businesses on the cheap because a few shareholders make mistakes. It's very rare for private owners to make that kind of mistake.


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## fraa (10 April 2016)

Hello luutzu - Just to make it clear I am not the OP - I do not want to use a small/micro business as a passive investment - but rather I want to run it myself.





luutzu said:


> If you're interested in becoming a passive investor, why in the world would you invest in a micro business?
> 
> Passive investing is define as you writing a cheque with a few zeroes; the owner/s sign a piece of paper that said you own it; then they send you reports now and then; hopefully with dividends here and there. Right?
> 
> ...


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## sptrawler (11 April 2016)

luutzu said:


> If you're interested in becoming a passive investor, why in the world would you invest in a micro business?
> 
> Passive investing is define as you writing a cheque with a few zeroes; the owner/s sign a piece of paper that said you own it; then they send you reports now and then; hopefully with dividends here and there. Right?
> 
> ...




+100, the only business to be in is one you are actively responsible for, otherwise buy shares.


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## sptrawler (11 April 2016)

fraa said:


> Hello luutzu - Just to make it clear I am not the OP - I do not want to use a small/micro business as a passive investment - but rather I want to run it myself.




Well the only small business I've seen do well are, well run internet business, or well run small businesses.

The well run small business, provides great customer service at a reasonable price.

Two I personally know of are dellis, both provide great value fast food, at a reasonable price.

They are in locations 60klms from each other, and are in no way affiliated, yet they are both always packed with people.
Their hamburger, or salad roll includes butter/marg and cheese plus beetroot, at around $5 they scream out the door.
Most businesses seem to drop off the product to maintain the price, I think as things tighten,the product has to improve to encourage the consumer to buy.
Just my opinion as usual.


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