McLEAN AND CO MARCH  2005  NEWSLETTER  PAGE 2     

PROS AND CONS OF STARTING A FRANCHISE

Is buying a franchise a good way to go into business?

It can be.   Price Waterhouse Coopers in a recently completed study sponsored by the International Franchise Association estimates that about 1 in 12 retail establishments in the US are franchises and $1.15 trillion in sal es (about 40 percent of all retail sal es) were made through franchised establishments in 2001. While not every franchise or every franchise owner is successful, franchising has the potential to reduce some of the risk of launching a new business by letting you copy a business concept someone else has already made successful.

What specific benefits does a franchise have?

Depending on the franchise, among the benefits you might gain are:

What are the disadvantages?

The security you acquire by franchising business methods and practices has its price.      Among the drawbacks of being a franchise are:

·         Your start-up costs can be high.

·         You will have to follow the franchisor's rules. That means you might have limitations placed on everything from what products and services you sell to what goes into ads, where you are allowed to sell, and even how your business is furnished.

·         You pay a percentage of your sal es and/or a flat fee to the franchisor (company from which you purchase the franchise) each year.

·         Your success is dependent in many respects on the brand, talents, foresight, and stability of the franchisor.

·         You will be locked into the terms of the contract with the franchisor whether your operation is successful or not.

VALUING YOUR BUSINESS

It goes without saying that you when selling your business you want to get the best possible deal that you can. But how do you actually put a value on your business and what can you do to ensure its price is as high as can be justified?

Defining your Assets

First of all, look at your assets. If someone bought your business, what would they really be acquiring? There may be an inventory of machinery, a list of employees and a certificate for the premises but these are only part of what your business is worth.

Consider what you've established over time and how to define it.       Honest assessment of your business's assets will attract potential buyers and be financially rewarding for you.    

You should look at all the following:                                  (Cont Page3)

      McLEAN AND CO MARCH  2005  NEWSLETTER  PAGE 3     

Whoever buys your business will profit from it being unique and ready-made and the price should reflect these advantages.

Grooming your Business for Sale

Appreciating your assets is all well and good, but remember, your business is only worth what the highest bidder will pay, so it will need to be operating at its best when you're looking to sell.

It is important to make all the paperwork as impressive as possible. Try to:

Valuation

Even if you taken into account all of the points mentioned above, there are a number of factors you can't control that will affect the value of your business.

In addition to the business' recent profit history and the value of its assets, the valuation will be affected by the current market demand for that type of business and the current economic climate at the time - this will always affect certain businesses more than others.

Other factors also often come into play, perhaps due to special circumstances of the particular buyer and seller. These are trade offs between cash and terms, and relative tax consequences for the buyer and seller, which depend on how the transaction is structured.

Despite the range of factors that can influence the value of a business, there are a couple of rule-of-thumb formulas. These formulas are more a quick means of established a 'ball park' figure than an accurate sal e price and are normally calculated as a percentage of either sal es or asset values, or both.

To get an actual sal e price, you should contact a business property agent to come and make a sal e. As you would do when buying a house, get a number of valuations to get an average.

Even if you intend to sell your business yourself, there's nothing stopping you getting a professional valuation. Also, look at similar businesses being sold in the area and look at how long it took for them to be sold - how quickly you need to or able to sell, could have a significant affect on costs and so will need to be reflected in your sal es.

      McLEAN AND CO MARCH 2005 NEWSLETTER PAGE 4     

FUNDAMENTAL BUSINESS PRINCIPLES

Buy cheap, sell dear.          (John Greenleaf Whittier)

Only a fool holds out for top dollar.                       (Joseph P. Kennedy)

Cut your losses, and let your profits run.             (Anonymous)

The engine which drives Enterprise is not Thrift, but Profit.       (John Maynard Keynes)

There are three secrets to real estate: Location, location, location.         (William Dillard)

If you can run one business well, you can run any business well.         (Richard Branson)

For unto every one that hath shall be given, and he shall have abundance: but from him that hath not shall be taken away even that which he hath.               (Matthew 25:29)

Every individual . . . intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.          (Adam Smith, The Wealth of Nations)

PARETO'S PRINCIPLE
Twenty percent of your products will generate eighty percent of your income. Twenty percent of your income will require eighty percent of your resources.               (Vilfredo Pareto)

There was an old owl lived in an oak, The more he heard, the less he spoke; The less he spoke, the more he heard. O, if men were like that wise old bird.            (Punch)

A dinner lubricates business.                    (William Scott, Baron Stowell)

PARKINSON'S LAW
Work expands so as to fill the time available for its completion.         (C. Northcote Parkinson)

THE PETER PRINCIPLE
In a hierarchical organization every employee tends to rise to his level of incompetence.      ( Lawrence Peter)

MURPHY'S LAW
If there are two or more ways to do something, and one of those ways can result in catastrophe, then someone will do it.                  (Edward A. Murphy, Jnr)

Do it fast, do it right, do it cheap. Pick two.                        (Anonymous)

A camel is a horse put together by a committee.            (Anonymous)

One may smile, and smile, and be a villain.           (William Shakespeare, Hamlet)

Don't be afraid of going slowly. Only be afraid of standing still.              (Anonymous)

Trust yourself. You know more than you think you do.             (Benjamin Spock)

Don't be afraid to take a big step when one is indicated. You can't cross a chasm in two small steps.
(David Lloyd George)

You can gain strength, courage, and confidence by every experience in which you really stop to look fear in the face. . . . You must do the thing which you think you cannot do.            (Eleanor Roosevelt)

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TAX TITBITS

DEPRECIATION RECOVERY

When you cease a business, sell or dispose of a business asset you must make an adjustment in your end of year tax return to account for the gain or loss.  A gain is included as gross income and a loss (except buildings) as an allowable deduction.

Ceasing business

Where an asset ceases to be used in a business, or if you cease business and don't sell your business assets immediately or if they are kept for private use, the loss or gain must be accounted for using the market value of the assets as at the beginning of the next income year.

You will have to make an adjustment in your income tax return for the year after the business ceased or the asset changed use, even if the loss or gain is not realised until a later income year.

Selling an asset

When you sell or dispose of an asset (other than a pooled asset) for a different amount from its adjusted tax value, you must make an adjustment in your end of year tax return to account for the loss or gain. The adjustment is generally made in the year you sell or dispose of an asset except when the business has ceased (see above). 

You cannot claim a deduction for depreciation in the year that you dispose of an asset, except in the case of buildings.

Example:

If the asset has been used for both business and non-business purposes, you must apportion any loss or gain on dispo sal between business and non-business use.

WORKING FOR FAMILIES

Working for families is a new government initiative to help working families gain assistance.  To view information to see if you may now be entitled to receive family assistance under the new criteria, check out the website at        www.ird.govt.nz/promotion/wff/

      McLEAN AND CO MARCH  2005 NEWSLETTER PAGE 6    

TAX TITBITS

INCOME THRESHOLDS FOR STUDENT LOAN REPAYMENTS AND INTEREST WRITE-OFFS TO RISE

Income thresholds for student loan repayments and interest write-offs will rise from 1 April 2005 .

The income level at which borrowers must begin to repay their loans will rise from $16,172 to $16,588.   The maximum income level for a full interest write-off for part time students will rise from $26,140 to $26,799.

Borrowers whose income is below the repayment threshold will not have to make repayments on their loans and a large portion of their interest will be written off.

Full-time, full-year students will continue to receive a full interest write-off while they are studying, regardless of their income.

INCOME TAX ACT 2004  

The Income Tax Act 2004 (“2004 Act”) is a substantial rewrite of the Income Tax Act 1994 (“1994 Act”). The 2004 Act will take effect from the 2005/06 tax year. This 2004 Act applies as early as 1 October 2004 for taxpayers with early balance dates. The aim of the rewrite was to enhance the clarity of the existing legislation without making significant changes to the law. There are, however, some intended policy changes in the 2004 Act, and they can be found in Schedule 22A. These are mainly minor changes or clarification of existing rules. Some intended policy changes include:

Land and Associated Persons – generally, the test of association for land transactions applies at the time the land is acquired (not at dispo sal ). In relation to builders, the test will apply at the time the land improvements are completed. Therefore, where a person is not associated with a builder at the time of acquisition of property, but later becomes associated when improvements are carried out, a gain realised on the property may be subject to tax. Conversely, the property will no longer be caught by the association rules where the person was associated with a builder at the time of acquisition but was not associated when improvements are carried out.

Timing of Income Recognition – this change will alter the timing of when certain income is recognised. This means there will be no need to alter any past tax returns where liabilities are remitted or cancelled or expenditure is recovered, for example, from insurance claims. The amounts will now be returned in the year the liability is remitted or cancelled or when the expenditure (previously claimed as a deduction) is recovered.

Motor Vehicle Expenditure – IRD mileage rates may now be used to calculate the business use of a vehicle (up to a maximum of 5,000km per year for each person).

Farm Land Expenditure – this change clarifies the timing of deductions and prevents potential overlaps in relation to some farmland deductions and amortisation.

Livestock Valuation – the rules have been amended to ensure that a valuation election made for partnership livestock does not apply to a partner’s other interests.

A key issue with the 2004 Act is how taxpayers should deal with unintended policy changes or uncertainties resulting from the rewrite. The IRD has issued an exposure draft to deal with uncertainties that arise as a consequence of unintended policy changes. The IRD has indicated that penalties and interest will be remitted where  the taxpayer relied on the 1994 Act, and the 2004 Act was found to be different, or the taxpayer relied on the 2004 Act and the 2004 Act is subsequently amended.

Therefore, reliance can be placed on either the 1994 Act or 2004 Act, provided the interpretation of either Act is acceptable.

McLEAN AND CO MARCH  2005  NEWSLETTER  PAGE 7    

HANDLING CAPACITY

Have you got too much work for your business.   Wouldn’t it be a nice thought!!    What should you do?

Often in this situation the principal feels like they are being pushed toward growth because clients need more stuff.  That's not a good reason.  You don't want to let growth happen to you (growth is defined here as adding employees, not increasing sal es).  If you can add sal es without adding employees, go for it.  That's not to say that you shouldn't grow, but rather that growth should follow careful consideration.  One way to make sure that growth makes sense is to follow a stepped decision making process that first leads you through the alternatives.  Next time you are tempted to add staff, walk yourself through these steps.

First, do you have some lower level clients that should be phased out?   It's easy, and natural, to become attached to clients who might have been a good fit for your firm in the past, but whose needs have not kept pace with your abilities.   Unless a particular client is of a sufficient size to a) make money and b) do effective work, consider moving on.   This might involve sitting down with them and explaining the situation, giving them a chance to provide you with more opportunities in the relationship.   If that isn't possible, introduce them to a smaller firm.   The fact that a particular client doesn't provide you with a lot of volume is not as important as providing you with profitable work.   That's the key,  and if they don't fit, phase yourself out of the relationship, providing additional capacity for your overflow work. This is always the first thing to consider before adding staff.

Second, make sure that you are charging for all of your time (either in the estimating or the invoicing stage).   There's no point in adding staff in order to subsidize even more clients!

Third, raise your prices.   Money is a wonderful filter, and it makes sense to be less busy at a higher rate than to be busier at a lesser rate.    Raise your prices before adding people, too, so that your client base will have a chance to settle in.   You'll find out who is going to stay around and who isn't.

Fourth, make sure you can fund this growth with cash, whether that will cover build out expenses, employee acquisition, new workstations, or the increased overhead from this point forward. Spending cash will be a good discipline and also ensure that you can cut back if that growth decision needs to be reversed.

Fifth, ask yourself whether you are comfortable inching more towards management and away from "doing."   Your role will change just a little bit with each new employee (particularly when you expand beyond 5 total employees for each senior person at the firm).

Finally, if you are comfortable with growing after stepping through this five-part checklist, go for it.