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How to create a franchise business plan

By FranChoice Blog | Jul 25, 2019

franchise business plan

If you’re considering the purchase of a franchise, you’re probably exploring financing options. And an essential part of that process is the preparation of a franchise business plan. It’s likely the first thing a lender will ask you for. Take note that even if you’re not seeking outside funding, developing a plan is worthwhile. Here’s a look at what’s involved.

Readily available information and data

Preparing a franchise business plan is a lot easier than preparing a plan for an independent startup business. This is because you have easy access to much of the necessary information. During the sales process, the franchisor typically provides a great deal of verbiage you can use for the narrative sections of the plan. And you can find much of the required financial information in the earnings section of the Franchise Disclosure Document (FDD).

In addition to the typical sections in any business plan, a franchise business plan will include a section outlining the track record of and support available from the franchise company. You may include items like the franchise company’s sales brochure or FDD as attachments to your plan. This additional information can give lenders a higher degree of confidence in your likelihood of success.

5 sections of the business plan

The format of a typical business plan, whether it’s for an independent business or franchise, usually includes the following 5 sections:

Introduction

This describes the business, including the products or services the business offers, the size and competitive aspect of the market, the operational approach that will be used, and the challenges and risks associated with start-up.

Management section

This section identifies and provides background information about the people in management roles. It might include their resumes or descriptions of relevant prior experience.  A franchise business plan also provides information about the franchisor’s direct support staff.

Marketing section

Here you define your target customers and how you plan to attract them to your business. This section explains the business’s competitive advantages and details marketing and advertising plans.

Pro forma financial projections

This section includes income statements, cash flow statements, and balance sheets that project the anticipated financial performance of the business. The statements should specify all material assumptions used to prepare the projections. Prepare these projections on a very conservative basis in case unexpected delays or challenges arise.

Financing needs

Even if you are self-funding the business, always prepare a section related to financing needs. This should include an analysis of all startup costs, including working capital to cover initial marketing plans and operating losses until you reach the projected break-even point. Even if you’re not borrowing from an outside source, the process of developing this section will prepare you for what’s to come in starting up the business.

You should be able to find much of the information you’ll need for the Introduction and Marketing sections on the franchisor’s website. The FDD will help you complete the Financing Needs portion of the report and, if the franchisor publishes a representation of earnings in Item 19 of the FDD, you may be well on your way to completing the Financial Projections section as well.

A helpful and worthwhile process

Some franchise companies require prospective franchisees to start and/or complete their franchise business plan prior to being approved. In any event, it’s a good idea to start thinking about your business plan early on. The process of preparing the plan is helpful in many ways. It forces you to consider options and formalize your projected course of action in the new business. You’ll typically identify questions during this process that may not have otherwise occurred to you. Contact the franchise company to get answers and make sure you have a clear understanding of the franchise prior to making a final decision to proceed.

Remember to update and finalize your business plan after completing the franchisor’s initial training. After training, you’ll have a far greater understanding of aspects like operational and marketing plans for the business. Most franchisors will also provide financial data that you can use to double-check, or even replace, the Financial Projections section of your business plan. Review your entire business plan based on your new knowledge, and you’ll be as prepared as possible to get your new franchise business up and running.

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Evaluating a franchise opportunity: 5 red flags

By FranChoice Blog | Jul 17, 2019

evaluating a franchise

When evaluating a franchise, it’s critical to research every opportunity very carefully. Do you know how to spot indicators of potential problems? Be particularly cautious when you encounter any of these issues:

Evasive or unprofessional franchisor

When evaluating a franchise, it’s your job to ask questions and scrutinize responses. If the franchisor is evasive, unprofessional, or aggressive, consider it a sign you should look elsewhere. If they’re not courteous and cooperative during the sales process, there’s little chance they’ll be any easier to deal with when you’re a franchisee.

Unhappy franchisees

What should you do when evaluating a franchise where many of the current franchisees seem dissatisfied? The safest move is to move on to other opportunities. It’s preferable, of course, to find that the franchisees you speak with are satisfied with their business, its financial results, and the value they receive from the franchisor.

Franchisee turnover

The due diligence process for evaluating a franchise includes review of the Franchise Disclosure Document (FDD). The franchisor must disclose the history of franchisees who have left the system and the reasons they did so. A high rate of turnover can be a red flag. You’ll need to determine whether it means that the business is not consistently successful at the unit level.

During your research, differentiate between units that close because the owner could not succeed and units that the owner sells as an exit strategy. How long has the franchise been in operation? In a younger franchise system (i.e., active for only 5-10 years), any significant turnover should be carefully explored. If the turnover is a result of the termination of franchisees, this indicates a problem. Turnover due to resale of successful units is another story.

Litigation history

Check the FDD to see whether the franchisor has a history of litigation. As a general rule, more than one or two cases per 100 franchisees could indicate a problem area. Look at the contested issues to distinguish, for example, actions brought by the franchisor against franchisees who aren’t paying their bills versus those brought by franchisees alleging misdeeds by the franchisor.

Too good to be true

There’s a good reason for this old adage: if an opportunity seems too good to be true, it probably is. If a franchisor is unwilling or unable to recognize and disclose the flaws in their business (every business has them), be forewarned. Transparency is a good thing, and that means telling prospective franchisees about the challenges as well as the benefits.

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