Franchise Advice
In brief
• The fi gure you should bear in mind is the total investment
• Your business plan needs to be coherent and watertight:
including the working capital amount
- Include fi nancial and non- fi nancial information
- Prove knowledge of your market and local demand for your product or service
- Set out how your chosen franchise brand has achieved success and how you will replicate that success by following their model
F
inding the right franchise for you is a major undertaking. It will involve a signifi cant amount of time, thought and research. An important consideration in
the initial stages of your journey is securing the necessary funding. Prior to starting your search for funding, you need to understand the total investment required, how much you can contribute from your own resources and thus how much fi nance you require. I have spoken to many would-be franchisees who, when asked about the total investment, replied only with the cost of the franchise fee. The total investment is the sum of all costs associated with the setup of the franchise – don’t forget working capital and vat!
The amount of working capital required in the business is one of the most critical outcomes of the fi nancial planning process. It is often the number that people get wrong! If you don’t have enough working capital then you run the risk of running out of cash and consequently risk closing down. You need to prepare a business plan
with fi nancial projections to calculate working capital and the total investment. The business plan should serve three main functions: • Firstly, it should set out the investment you need to make and the returns you are expecting the business to deliver
• Secondly, the plan becomes a key element of the funding application
• Thirdly, you should use the plan to monitor your performance and manage the business on a continuing basis
Getting the business plan right is essential to successfully raising fi nance.
I regularly see people who have approached lenders directly and have subsequently been declined for fi nance, not because they are not credit worthy, but because their business plan doesn’t work from the lender’s perspective. As an application for fi nance, the business plan needs to include all the information that is required by the person evaluating your proposal on behalf of the lender. It should start with an executive summary, which should give a concise overview of the business opportunity and funding requirement. It needs to identify who the owners of the business will be and provide their personal information. You also need to set out your personal assets (house, investments, savings) and liabilities (mortgages, loans, credit cards). The lender will want to see what your household expenditure is and what income you have to cover this. They will want to make sure that you can aff ord to pay the bills while growing the business. If your income will be coming from the new business, make sure that you include this within the fi nancial projections. The business plan should include information about the franchisor, the business model itself, how the franchisor will train you and support you and how the products or services will be marketed. It should also set out your business objectives. You need to show the total investment required for the franchise, how much of the investment is coming from you and how much fi nance you are asking for from the lender. This brings me to the fi nancial forecasts.
You need to include forecast profi t-and-loss projections, a separate cashfl ow forecast and a forecast end-of-year balance sheet.
The profi t-and-loss projections will show the trading activity for the business, the sales, costs and how much profi t you expect to make. The cashfl ow forecast will set out the incoming investment from you and any fi nance, the setup costs going out, the money coming in and out through the trading activity and vat. In simple terms it is a forecast of what your bank account will look like at the end of each month. Remember that these are projections of what you expect to happen, but reality is diffi cult to predict. This uncertainty is part of the risk of setting up any business. However, with a franchise you reduce this risk because the franchisor has, through its pilot operation or existing franchisees, already tried and tested the model. This is why lenders love lending to franchises, because they are operating a proven business model. If you can reference the fi nancial performance of existing franchisees as the basis of your sales and cost assumptions in your business plan you will add hugely to the credibility of your proposal and maximise your chances of getting your fi nance approved. Running a business means you need to be able to manage all aspects of the business but that does not mean that you need to be an expert in all aspects. Take time to identify where you need assistance and then engage the right resources for the benefi t of the business.
Rob Orme QFP
is the franchise relationship manager at Franchise Finance
July/August 2018 |
BusinessFranchise.com | 39
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