Franchise Developments tips on how to write a winning business plan
Why do you need a business plan, and how should you set about developing one? Most leading franchisors and financial lenders expect prospective franchisees to produce a business plan. Typically, the aspiring franchisee sees this as an obstacle that must be navigated in order to gain approval from the franchisor and lender. But a business plan is much more than a 'necessary evil'. it has benefits for you - the franchisee - as well as for the franchisor and any potential lender.
A well considered plan is a blueprint for your success, setting out your long-term goals and strategy for achieving these, Giving the preparation of a business plan the time and attention it deserves will demonstrate your commitment to applying for the grant of a franchise.
A well considered business plan will show the franchisor that you're not a 'tyre kicker', but rather that you have a sound business proposition. Meanwhile, a prospective lender will be assured by the financial case you present.
Part of the decision-making process
Together with your due diligence on the franchise system, the preparation of your business plan is an essential step in helping to determine that you are making the right purchasing decision. It will enable you to make an informed assessment of the business, the market, and particular locations, In the process, you will be able to review your own strengths and weaknesses as well as those of the franchised business, and be able to identify critical success factors. Preparing your financial analysis, forecasts and financing needs will alert you to any shortcomings.
Franchise financing executive with Commonwealth Bank, Rob Beaumont, says that his request to franchisees fora business plan is normally met with initial resistance, characterised by the rolling of their eyes. As Beaumont explains: "A business plan is not meant to be a hurdle, but is meant to help make a better informed decision." Despite their initial resistance, Beaumont says, most applicants end up finding the process very rewarding, because it reveals things they hadn't previously thought of.
Getting started
So how should you set about developing your own business plan? Ideally, you should prepare the plan yourself. White it may be quicker and less demanding to have a business consultant or your accountant prepare the plan, they are not the ones who will be taking up the franchise and experiencing the risks and rewards entailed in the business.
Preparing the plan yourself will lead to more individual research and a better understanding of the business and the respective roles of the franchisor and franchisee.
It is essential that you convey why you believe you will be successful in the business. The franchisor and the lender will want to learn how you are planning to succeed - not to see how well others can write for you. Having said that, there is value In having a professional advisor review your plan and provide an objective perspective.
There is no cause to become overwhelmed with the task in front of you - a business plan need not result in a lengthy 30- page document. An effective plan that satisfies both the franchisor and the lender could be as concise as three to five pages. Obviously, the length of the plan will vary depending on the size and complexity of the business involved – for example, a business plan for a small mobile franchise employing three staff will be quite different from that of a large retail operation with 20 staff.
However, all business plans need to address key areas. Many of the leading banks and larger accounting firms provide templates and guidelines on how to prepare a business plan. Templates and other assistance is also available through the small business office in each Australian state and territory.
Key areas to cover in your business plan
The success of your business plan lies in your homework and preparation. As such, the following key areas should be covered:
SAMPLE BUSINESS PLAN
Table of contents
1. Executive Summary
1.1 Why are you going into business
2. Financial Analysis
2.1 Total Investment
2.2 Budgeted cash flow
2.3 Budgeted profit and loss
2.4 Personal balance sheet
3. SWOT Analysis
3.1 Strengths
3.2 Weaknesses
3.3 Opportunities
3.4 Threats
4. Market Study
4.1 Location
4.2 Competition
4.3 Lease
4.4 Local marketing plan
Executive summary
This section should comprise one to two paragraphs, conveying why you want to go into this business and why you believe you will succeed. In other words, what is the attraction and motivation for you?
There is no need for you to go into great detail about the franchised business concept, its history, growth and features. The franchisor already knows this, and the lender will most likely know as well. For the lender, you may choose to add some key franchise information as an appendix to the business plan. The executive summary should be dearly written, straightforward and convey your confidence.
Financial Analysis
It is pragmatic to make your financial planning the early focus of your business plan, because this will be of major interest to both the tender and the franchisor. From a business banker's perspective, there is no value in receiving a detailed 30-page business plan that overlooks the viability of the business, It is better to receive a one-page plan that demonstrates the individual's financial ability, and be able to request an expansion of the plan.
Your financial planning is the foundation of your business planning. Conducting a detailed financial analysis, including projections, is critical in demonstrating to a lender that you have thought through the financial implications of your business.
Importantly, it will demonstrate your expected returns from the business. Richard Angley, Franchising Partner with McLean Delmo Accountants, suggests your analysis should Include the following:
Total investment
Establish the capital required for the business. The total figure should be broken into subtotals for major categories, such as the franchise fee for a new business (often referred to as a 'greenfield site’ or goodwill for an existing business, fixtures and fit out, equipment, stock, prepayments (such as deposits and bonds) and working capital. Beware of hidden costs, such as legal and accounting advice.
Budgeted cash flow
Estimate your annual revenue for the next three years, showing the monthly income and cash flow after all expenses are accounted for. Prepare for ‘best’, ‘worst’ and ‘expected’ scenarios. Templates for preparing a cash flow forecast are available from major banks, many franchisors, your accountant, and the government department responsible for small business in your state or territory.
Budgeted profit and loss statement
In conjunction with your budgeted cash flow, you should be able to complete your budgeted profit and loss statement for the next three years. This will demonstrate your expected profitability and show the expected return on your investment.
If you are looking at buying an established franchise business, ask for and attach the last three years profit and loss statements for the business.
Personal balance sheet
A personal balance sheet showing all of your assets and liabilities will illustrate your net worth. From this information, lenders will determine your borrowing ability.
Provide simple notes that explain your key assumptions and the basis of your revenue and expense items. This will demonstrate that you have thought through the process. Also allow for a constructive discussion with the franchisor, the tender and your advisor. It would be prudent to discuss your financial planning with your accountant.
Proposed funding arrangements
The proposed lender should be able to give you an indication of your borrowing capacity and associated repayment requirements, which can be reflected in your cash flow projections. As a rule of thumb, you can borrow up to 80 per cent of the value of your 'bricks and mortar' assets (as shown in your balance sheet).
Many banks have also accredited certain franchises to lend against the value of the franchise, typically ranging from 50 per cent to 75 per cent of the value of a new franchise or 2.5 times earnings before interest and taxes (commonly referred to as EBIT) for existing stores. Generally, the length of the loan is limited to the term of the franchise agreement or the lease, whichever is shorter.
Once you have established your borrowing capacity, you will need to consider the different types of funding available. Typical funding facilities include business loans, bank overdraft and leasings, or a mix of the three. The optimum type of funding should be discussed with your accountant, as it can impact on your monthly cash flow and tax liabilities.
SWOT analysis
Every credible lender and franchisor will expect to see a SWOT (strengths, weaknesses, opportunities and threats) analysis - not just of the business, but of yourself as well.
Strengths might include your previous business and work experience, people skills, particular qualifications or your proactive attitude.
Those areas, qualifies and competencies that you or your business needs to strengthen should be identified as weaknesses. Examples include: inexperienced staff, low brand recognition, high cost ratios, limited IT expertise.
Opportunities refer to the gaps in the market, or in the business itself that you could capitalise on. This might include catering for local events, meeting the needs of schools or offices in the area, improving customer convenience (such as waiting time) or providing delivery.
Threats to your position within the market, and therefore your performance, could include the arrival of new competition or the introduction by a competitor of the core products and/or services of your business.
Market study
You want to be confident that there's a sustainable opportunity for the products and/or services of the franchise you are considering. As such, a careful analysis of the market and your potential location needs to be conducted.
In conducting research, consider drawing on industry statistics, trends, and analyses of customer profiles, market size and growth rates. This information can be sourced from industry associations, the internet, and specialist demographic analysers. Their costs are not prohibitive.
Once you are reasonably comfortable with your chosen sector, a close examination of any proposed location and the associated lease conditions is a must. The most basic and effective examination is to sit in front of your proposed site at different times and examine traffic flows and the typical demographic of your shoppers. An examination of neighboring tenants is also valuable. Spend time on the street or in the centre.
Every business has competition. Look closely at the level and quality of competition and assess how many competitors there are, their presence, their attractiveness relative to the business you are considering. If you are comfortable with the location, then have an experienced lawyer review your lease.
Local marketing plan
There is a widespread misunderstanding among franchisees that the franchisor will take care of all the marketing and promotion. This misconception will almost certainly limit the potential of your revenue, profits and goodwill.
Typically, higher-performing franchisees have a thorough understanding of their market and customers. They are marketing-focused and run planned local marketing campaigns throughout the year.
Planning, implementing and monitoring a regular local marketing program is far more valuable than having a unique initiative and not doing anything with it.
Local marketing ideas are not difficult to source. There is a rich reservoir of ideas readily available. Possibilities include networking, local newspaper advertising, sponsorship, website, mailing lists, database, letter box distribution and leaflets.
You might include a local marketing schedule, along the following lines, in your business plan:
Describe how you intend to identify and record the source of your customers and their value to your business. You can then monitor the performance of your marketing.
Optional extras
1. Operating and business structure
The lack of clearly defined job roles is a major source of frustration, stress, staff turnover and disenchantment within a business. All too often, this results in burnout or break down of partnerships.
Describe the key functions required by the business, such as sales, marketing, and office administration. Consider what your staffing needs are initially and into the future. No matter how small your business will be in the beginning, identify the size of the management team and the number of employees. List out each job description and its associated responsibilities. Give yourself a job description also.
With regard to business structure, are you planning to operate as a sole trader, company, partnership or trust? While the franchisor and/or lender may be agreeable to you operating in any of these ways, each structure boasts different advantages and disadvantages in terms of taxation and succession planning.
In the long run, it is cheaper and easier to establish the business structure most appropriate to your needs from the outset. Once you plan to proceed with the franchise business, seek a competent advisor, so that you can maximise your asset protection and tax planning. It is often too late or too difficult to address these issues when you plan to sell the business.
2. Business advisors and mentors
Engage proven advisors - ideally, ones who have been recommended by clients in a similar position to yourself. Consult them as you need to and ensure you fully comprehend their advice before accepting it on face value. A good advisor will get you on track sooner and help you stay on target. It is useful for you to identify your business advisors and mentors in your business plan.
Presentation of your business plan
1. Length
Deciding on the optimum length is a challenge. Your business plan needs to be long enough to cover all the important points, yet short enough to maintain interest. As suggested earlier, three to five pages would satisfy most franchisors and bankers. Remember also that the business plan is for yourself and your needs too, and may therefore extend beyond three to five pages.
2. Contents
The document you present to the franchisor and the lender should primarily cover the areas identified earlier: executive summary, financial analysis and forecasts, SWOT analysis and marketing, plus an appendix that lists the other research and planning you have carried out, such as business and operating structure, advisors and mentors.
If the franchisor and the lender need more information, they can always ask for It. Don't overwhelm them with more material than they might want to look at.
3. Appearance
Use headings, subheadings and adequate spacing to make the plan easy to follow. Graphs or tables can be used if they are relevant and illustrate a point.
An elaborate presentation is not necessary, and might merely suggest that you've paid a professional to prepare it. The plan will be more impressive and persuasive if it reflects your work and thinking. Ensure your business plan is neatly presented without spelling mistakes - consider paying to have your plan proofread by a professional.
This article was written by Sergio Alderuccio. the Founder and Managing Director of Franchise Developments .
12.12.2007
FCA Member
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