This article delves into the financial side of franchising, focusing on how you can avoid making few petty mistakes while buying a franchise.
Although the business plan is your own roadmap for the franchise, when it comes to arranging finance, your business plan needs to include all the information required by the lender that is evaluating your proposal.
Below is a list of selected key mistakes that franchisees commonly make.
Not borrowing at the outset and using up all or most of your own money first.
It is not uncommon for people with just enough cash to use their own money and not borrow. This could be because they don't want to pay fees and interest, or because they don't think the banks are lending. This can prove to be a poor decision because it is possible that trading may not be as good as was originally expected and therefore you may start running out of money. An approach to a lender at that stage, where losses are being made will most likely prove unsuccessful.
In reality, it would be much better to request a loan at the outset, say for 50% of the total amount required, when everything looks promising and the business plan demonstrates viability.
Not having a business plan to help quantify objectives.
Starting or growing a new franchise business without a comprehensive and professional Business Plan is rather like going on an important car journey without a road map, not knowing how safe your car is and how much petrol you have or will need to reach your destination!
Why would you leave so much to chance?You want to give yourself the best possible opportunity to arrive safely, or in the case of your business, make sure that you achieve your key business objectives without running out of money!
This is why having a good business plan, whether you are borrowing money or not, is so important. It acts like your Business Sat Nav, helping to guide you from where you are now to where you want to get to on your business journey. A good business plan helps you to see what is around the corner and giving you something to regularly measure your progress against.
Not having a full set of financial projections.
Make your mistakes ‘on screen’, not in real life! You should use a projected profit and loss account to gauge profitability and ensure your plans are worthwhile taking forward and a cashflow forecast to establish how much money is needed at the outset, so you do not run out of working capital during the course of your business journey. It is hugely important to be confident that your business is properly capitalised at the outset.
In reality, sales in the first few months will probably be lower than the final few months of year one because it is likely to take some time for the business to become established. However, the overheads (e.g. salaries and rent etc.) will probably be consistently high from month one. This means that for the first part of the year the business will be making a loss and will need some additional cash to sustain it through and into the profitable months in the second part of the year. This cash is called ‘working capital’.
The same problem arises if an existing business is suddenly going to increase its planned sales, perhaps because of a new marketing strategy or a product launch. To cope with the extra expense and probable time lag, before sufficient cash from sales is received, the business is likely to require additional working capital. The question of ‘how much’ will be answered by using the financial projections model described above.
Not monitoring actual performance against the projections or using sensible Key Performance Indicators (KPIs).
In the same way as with a car journey, you need to check from time to time that you are on track to arrive safely at your destination as planned. It is exactly the same with your business journey, you need to monitor your actual performance against your financial projections using appropriate KPIs.
Not preparing for eventual exit.
When it comes to selling your business, there is a lot you can do in advance to ensure a quicker and easier sale. Failure to prepare can affect your ability to sell, it can impact on the price you achieve and can also impact the ability of a prospective buyer to raise the finance they may need. You need to ensure that when a purchaser undertakes their research, the risk of them finding any significant problems has been reduced.Getting into good habits right at the beginning makes good sense!
It also makes sense to use the services of a professional consultant at least two years before you propose selling the business to help you ‘shape’ the last few years, show appropriate trends and begin to create the ‘sales pack’ to maximise the ‘good will’ value you will hope to receive.
This article has been authored by Rob Orme, Marketing Manager at Franchise Finance Limited. He is the youngest recipient of the British Franchise Association's qualified franchise professional award.