Franchise Finance - Do The Numbers Add Up?

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Franchise finance - know your numbers

You’ve spoken with the franchisor, attended the Discovery Day and you’ve fallen in love with the idea of being your own boss. Yes, you’re pretty certain that you’ve found the right franchise for you. So, now it’s time to consider the financial aspects of the franchise. But you’ve never run your own business before and you don’t feel confident questioning the financial projections provided by your prospective franchisor.

Lack of faith in your abilities to understand the financials could determine whether your new business venture succeeds or fails. Ignoring them is not the answer; so, it’s time to dust off your calculator, book an appointment with your financial adviser and tackle the issue of money head on.

Where do you start?

At its simplest, the equation that must add up is whether you can earn enough money to live on. Once you know what this number is, you can then assess whether similar size franchise territories are currently generating a net profit anywhere near this amount. Your prospective franchisor will be able to give you this information, so don’t be afraid to ask.

Of course, compared to an independent business, there are likely to be less financial unknowns with a franchise. Your franchisor will have experience of setting up businesses just like yours and will work with you to development a financial forecast. But a franchise doesn’t guarantee success, nor can it promise that the projected finances will be totally accurate.

An often-overlooked part of running a business is the need for sufficient working capital. This is necessity for franchisees too, particularly in the early days when the business is being set up. Although you’ve invested in a well-established franchise, there still may be a period where sales grow at a slower rate than you thought and customers may take longer to settle their invoices than you’d accounted for.

So, let’s take working capital as an example. Everyone’s individual circumstances are different and therefore the level of working capital required for each franchisee will differ too. If the amount of working capital needed is underestimated, then cash flow is jeopardised which threatens the success of the franchise.

Therefore, when choosing the best franchise for you to invest in, consider more than just the upfront fees. Have a full appreciation of other costs associated with the franchise and how much you’ll need to live on while the business is getting up and running. Only once you’re armed with this knowledge will you be able to confidently invest without the threat of any unwanted surprises.

Who can you speak to?

The first place to start is with the franchisor. Their success is dependent on your success, so you shouldn’t encounter any issues when asking the franchisor to explain how they have calculated the projections in the Franchise Disclosure Document (FDD) or draft business plan.

Open and honest conversations with the franchisor will reveal the assumptions that have been applied to the financial projections. Are they based on the average performance of the entire franchisee network, or are they more realistically produced considering the size and location of your future franchise? Are the figures assuming a positive economic climate or based on more demanding market conditions? Only the franchisor can answer these questions, and a good franchisor will happily do so.

After speaking with the franchisor, your next port of call is to validate the legitimacy of the financial forecasts with several existing franchisees. They can provide you with a truthful account of whether the projections are both accurate and achievable, or not, as the case may be. The franchisor should encourage these discussions.

What does the future hold?

No one can predict the future and no crystal ball can tell you if your franchise business is going to be a success in the long term. What you can do though is consider from the outset whether the franchise you’re about to invest in is future proof or not.

There are many factors that can impact the future profitability of a business. The limitations of the franchisor’s growth plans being the main culprit. Incorporate the franchisor’s long-term plans into your early conversations. Do they have a vision of where the business will be in five, ten, or even twenty years? Do they have a strategy in place for dealing with any external changes, such as technology or the economic environment? A franchise that has a plan is much more likely to survive compared to one that only has a short-term vision.

The future profitability of any business is also dependent on competition. Know who the competitors are in your area and make sure that you keep up to date with the latest developments in your field. This is probably easier said than done when you’re engrossed in the running of a busy franchise business, but staying one step ahead of the competition is key to your longevity.

The trick is to view competition as an opportunity to learn. When a competitor comes on the scene that you didn’t anticipate when you started your franchise, see it as an opportunity, rather than a threat. They may have a new way of doing what you do or take an innovative approach to promoting their brand. But rather than rolling over and accepting defeat, appreciate that you may be able to learn from them and improve your franchise business at the same time.

Keeping money on your mind

The finances are just one of many factors that will play a part in your decision of which franchise to invest in. Improvement to your work / life balance, the fulfilment of being your own boss and the support the franchisor will provide are all huge considerations when choosing the right franchise. On the other hand, you don’t want to risk losing your hard-earned savings either, so spending time questioning and understanding the financial projections at the start, could save you money and misery in the long run.

>> Read more articles on the Finance sector

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