The Road Map - McLean Delmo Franchising
by
McLean Delmo
Tim Kilham looks at the business plan.
First up you will have to prepare a business plan if you are thinking of buying a franchise and need to borrow money from a bank to assist you with the purchase. Any bank, quite rightly, will insist on the preparation of a business plan. You should want to prepare a business plan when you are buying a franchise business, even if you are not borrowing money and do not have to prepare a plan. If you were going on a long road journey to an unfamiliar destination, you would always get out a road map and plan the journey and use the map to work out how you are going to get to your destination.
This analogy can be applied to a business -it's a long journey along unfamiliar roads to a destination - with the ultimate destination being financial success. A business plan is your road map.
It is the quality of the business plan that counts, not the number of pages. It should be succinct, but it should address the important issues in making your journey. If you are not sure where to start with your business plan you can turn to a number of sources for an outline of the basic information required. One source is your bank. Another is your accountant: an accountant experienced in franchising will be able to help you prepare your business plan or review the plan you have prepared and suggest improvements.
A search of the internet will reveal a wealth of information about business plans Turn to the franchisor of the system you intend buying into. Most franchisors will not get involved with the actual preparation of the plan, but they may well have a template for you to use.
When you are preparing your franchise business plan, there will typically be some main areas that the business plan should cover.
Ensure you include information about yourself, the intended owner - your personal and work history; the business structure -whether you intend to trade as a company, trust, partnership, etc and who will be the owners of the structure; staffing - the staff you will need to run the franchise and how much they will cost, including on-costs such as superannuation; marketing - how you are going to sell your product or service, what your target market is, what advertising needs to be done, what local area marketing; capital requirements - how much money you need and what type of borrowings you need; and financial projections - profit and loss and cash flow projections for at least 12 months and preferably two or three years.
The most important sections of the business plan – for both you and for the bank – are usually those dealing with capital requirements and the financial projections. Where should you obtain the data to use as a basis for preparing your financial projections?
Among the main sources is the franchise disclosure document. If the franchise system chooses to include earnings information in its disclosure document, you will find it at Section 19 of that document. The franchising system may chose not to disclose earnings information and that will be stated in the same section of the disclosure document.
Sometimes the franchisor will provide you with financial information that is not included in the disclosure document. If you are buying from an existing franchisee, you should always insist on obtaining financial statements for the previous few years from the seller.
If you are buying a greenfield site or even if you are buying an existing franchise, you should always talk to other existing franchisees and obtain financial data from them.
Having gathered the information from all these sources what do you do with it? As a minimum, you need to prepare profit and loss and cash flow projections on a month by month basis for at least the first 12 months of operation of your new franchise business. For many businesses, profit and loss and cash flow are two very different things, and not understanding the difference between them can make the difference between success and failure of the business.
For example, if your franchise sells widgets that cost $30 each and you sell them for $50 each, then every time a widget is sold you make a profit of $20. But if you sold the widget on credit –so that you only get paid in 30, 60 or 90 days time - then you make a profit of $20 when you sell this widget but you have no cash in the bank.
Further, you might have had to display the widget in your showroom for a month or two before you sold it, so it may even be that you had to pay the supplier for the widget before it was sold. Your cash flow would therefore be negative $30 (because you have had to pay your supplier for the widget but your customer has not yet paid you) but your profit is $20. You have made a profit but you have no money in the bank and you can't pay your wages and your expenses so your business might collapse.
The moral of the story is that unless you are running a business where you pay cash and receive cash you must prepare both profit and loss and cash flow forecasts. Your bank will be primarily concerned with the cash flow forecasts, because it gets paid out of cash, not profits.
For the first 12 months, at least, your profit and loss and cash flow forecasts need to be done on a month by month basis. Most businesses are seasonal, and as a result profits and cash flow will be positive in some months and negative in other months.
You need to plan for those peaks and troughs – your new franchise business might end up with money in the bank at the end of the year, but during the year there might be occasions when you need a loan or overdraft from your bank. These peaks and troughs should be known to you and your bank and be planned for.
Your business plan should also preferably – and particularly if you are opening a new franchise – contain profit and loss and cash flow projections not only for the first year but also for the second and third years. The forecasts may be less detailed than for the first year – they may simply be done on an annual rather than a month by month basis.
Once you have finalised your forecasts, you will be able to complete the capital requirements section of your business plan. At this stage you will know what the initial purchase price of the business will be, and you will know your cash flow requirements as revealed by your projections. You will also need to allow for some reserves in case the business does not go exactly according to your projections.
Armed with all this information you will know what long term finance and what short term finance you need and you will be able to put these requirements into the business plan. If you are uncertain as to what mix of funding you need, you can talk to your banker or your accountant who will be able to help you chose the right types of finance for your business.
Types of finance available include overdrafts, loans, commercial bills, leases and hire purchase. You need to choose the right mix of long-term and short-term finance for your business, with the help of your bank and your accountant.
Make sure you do your homework when preparing your plan, and in particular make sure that the financial sections of the plan are accurate – that the forecasts are realistic and based on sensible assumptions. In many cases, banks will have information on hand about the franchise system you are thinking of buying into, and if your business plan is not realistic, finance will not be forthcoming.
Remember the adage – those who fail to plan, plan to fail.
Tim Kilham is a partner with McLean Delmo , accountants and business advisors. Tim heads up the specialist franchising division. 24.06.2008
FCA Member
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Contact McLean Delmo
Level 3, 302 Burwood Road
PO Box 582
Hawthorn
VIC 3122
Tel: 03 9018 4666
Fax: 03 9018 4799
