Business Plans for Franchises
Franchises are great because they provide the entrepreneur with the opportunity to participate in an already successful business while being able to establish a new location that they can own and operate. One of the downsides to franchising is that these businesses have very strict protocols and procedures as to what an individual owner-operator can do with their specific location or territory. In some respects, a franchisee is much more like a general manager of one store or several stores rather than a completely independent business owner. For some entrepreneurs, this can create somewhat of an issue given that they want to have a substantial amount of flexibility and creativity with how they develop and market their operations. While most franchise agreements to allow for some autonomy relating to business expansion, any type of individual undertaking as it relates to marketing or other operations usually need to be done in conjunction with the
franchisor. It should be noted that most franchised businesses are great candidates for small business loans given that there is already an established operating history by the franchisor. Additionally, if this is a highly established franchise system and the brand name of the business is very well known within the market. As such, the start up risks that are normally associated with a new business are significantly ameliorated by working with a franchising business.
A business plan for a new franchise is very similar to that of a startup company. The primary exception is that there is usually a thorough discussion regarding the operating history of the franchise or, its market base, and how these off businesses operate on a day-to-day basis. Financial institutions love to provide loans to franchisees given the very low risk nature of these businesses. This is especially true for an individual is buying into a highly established franchise that has been around for several decades. As such, the strong demand among vendors to provide franchise business loans is going to remain steady over the next 10 years to 20 years.
Much like any other business plan, one that is specific for the development or acquisition of a franchise should have a three-year profit and loss statement, cash flow analysis, balance sheet, breakeven analysis, and business ratios page. Within this document, there should also be significant amount of industry research as it pertains to the specific service at the franchise he is going to be providing to the general public. An economic analysis should also be included so that it properly discuss is what happens to the revenues during times of economic recession or during times of economic prosperity. Most private investors and financial institutions want to see a diligent overview of what the entrepreneur will do when economic times are more difficult. This is one of the key factors when a bank is determining whether or not to provide a loan for the development or acquisition of existing franchise.
If the entrepreneur is looking to acquire an existing franchise than they should be able to showcase at least two years of operating history within the business planning documents as well. These documents should be provided by both the existing owners certified public accountant as well as their attorney to ensure their accuracy. One of the key things that needs to be discussed as well as whether or not the existing franchise can properly sustain a large debt capital undertaking for the acquisition. Usually, a small table showcasing the two years of operating history are included within the business planning document. The full tax returns are usually submitted in conjunction with the business plan as standalone documents.
One of the key things to discuss in the business plan as well as the amount of fees that are commonly associated with any specific type of franchise. Usually, there is an upfront fee that allows the individual to acquire the initial franchise license. There are also usually ongoing royalty fees that are a function of the gross revenues. For most service and products based franchise systems the monthly royalty fee is usually 5% to 8% of sales. However this can vary depending on what type of services the franchisor provides to the franchisee. In some cases, these fees may be lower or higher depending on the specific gross margins generated from each product or service sold.
When obtaining the necessary financing for a franchise, within the business plan – franchisors will often provide some level of financial support for entrepreneurs. This is especially true if the individual is going to be developing a number of different locations or territories within the franchise system. A discussion of this within the business plan is important because many third parties are going to want to see that the franchisor is very committed to ensuring the success of each individual location or territory.
Within the franchise focused business plan a thorough examination of the marketing that is used promote the business should be included as well. This includes discussing the national level print advertisements, television advertisements, radio advertisements, and expansive online marketing campaigns. Most large-scale franchisors have very large and dedicated marketing departments to ensure that they are able to reach the general public very quickly. One of the best aspects of owning operating franchises that the marketing is usually handled by the parent company. While there is some level of local marketing that is done by the franchisee, almost all national level and regional level marketing and advertising activities carried out exclusively by the franchisor. This is one of the benefits to paying the monthly royalty fees that are associated with the type of business. In some cases, beyond the royalty expense and entrepreneur that owns a franchise may
be required to put up some additional money on a monthly basis to contribute to a national pool of advertising funds.
In closing, a franchise business plan is very similar to that for any other type of company. The specific differences that there are a number of mentions of how this is an existing operation as it relates to being a franchise system. These are all very secure businesses given that they are able to effectively ensure that visibility and revenues are generated from the onset of operations. Most entrepreneurs that are looking to develop franchises or little bit less risky than their traditional new business startup counterparts. Franchises are expected to remain popular given their strong economic stability.