Congratulations! You’ve decided that owning a franchise is the right investment for you. You may have even already decided on the type of franchise, and maybe even the franchise brand you are going to pursue.
What’s next? Financing. Securing the funding needed to make your franchise dreams a reality.
Unless you are one of the fortunate people that have enough money saved to cover costs, you will likely be seeking a lender to make up the difference between the amount of money you currently have to invest and amount of money needed to open and maintain your franchised business until you "break even." (Breaking even is the point in the lifespan of a business where the operation starts turning a profit.)
To convince lenders that you are worthy of their money, the creation of a business plan is crucial.
Lenders use a business plan as a guide to assess whether the prospective franchisee is a on a path towards success and profitability. To approve loans, lenders want to have a clear, straightforward account of the business to be opened, the principals involved, and – perhaps most importantly – perspective on when the borrowed money will likely be repaid.
It's helpful to prepare for the meeting with the lender like a college graduate student would prepare for a thesis defense presentation. In both instances, it is the goal of the person (or people) going into the meeting to have done the adequate level of research, and be able to competently back up the stated claims for the desired result (the granting of a masters degree to the student and the gaining of a loan for the prospective franchisee).
But the business plan isn’t just for getting money.
Not only does a business plan help in securing funding, it forces you to take a hard look at the investment you are about to make. It gives you a chance to anticipate the challenges that come with opening a business, and temper unrealistic expectations.
As time passes and you move further into franchise ownership, the business plan you’ve created should be updated and utilized as a guide in helping you reach your franchise goals.
Parts of a Business Plan
Creating a business plan doesn't have to be complicated. The key is compiling the proper information to allay the reservations of the lenders you will meet with. This is where opening a franchised business offers a notable advantage over an independent business.
The Franchise Disclosure Document (FDD) provided by the franchisor of the system you are investing in contains a great deal of the information needed to complete a business plan. This information includes the company’s corporate background, a description of the target market, the competitive advantage of the product/service, marketing initiatives, plus the start-up and ongoing costs. Some franchisors even offer assistance to franchisees in the preparation of the plan.
There is no standardized length for a business plan, but no lender wants to read a novel-length presentation. The main thing is that the plan is thorough enough to cover all aspects of your franchise plan. You want to give the lender confidence that you are prepared to take on the managing of a business that will turn a profit in a reasonable amount of time.
Common parts of a business plan include the following, according to the Small Business Administration (a sample business plan is located at the end of this article):
Executive Summary: The executive summary is an overview for the entire plan. Hint: write this section last. The summary acts as the first impression of your presentation. If it doesn’t give the lender a good impression of what’s to come, it will be that much more difficult to gain funding.
Company Description: A good place to look for the information for this section is Item 1 of the FDD. Provide an overview of the franchise and its history to the lender. You will also provide a brief outline of the franchise’s service/product (you will give more detailed information in the next section).
Service/Product Description: Describe the service and/or product your franchise will provide to customers in detail. This section can be combined with the company description. Again, Item 1 of the FDD is where you will find much of the information you need for this section. Item 16 will also be helpful in discussing what you will and will not be able to sell as a franchisee of a particular franchise system.
Market Analysis: Use this section to prove to the potential lender that you are not jumping into a business venture before doing your research. Concentrate on the specific area (market) in which the franchised business will be located. The territory description in the FDD (Item 12) will help you to a point. Give a brief discussion of the following:
- How big is your market?
- What kind of people (demographically and financially) make up this market?
- Is the market underserved in regards to this service/product?
- If there is competition, who are your competitors and what is your competitive advantage?
- Discuss what experts are forecasting for the service/product in terms of trends and growth possibilities for your specific market (can include demographic, legislative or environmental factors).
Management Structure: This section provides a look at the people who will be responsible for the day-to-day operation of the franchise, particularly you as the owner. Is this venture going to be a sole proprietorship or will there be multiple owners? Explain if you will be involved day-to-day with business operations, or will be acting as an absentee owner. For yourself and all of the others with an ownership stake, if applicable, detail all business qualifications. Stress any and all experience (even if volunteer) that is relevant to being successful in the future with the franchise operation. Item 15 of the FDD will help with explaining the managerial obligations of the franchisee.
Marketing Plan: “How are you going to get customers,” is the main question you’re answering in this section. Use FDD Item 11 to your advantage here. It provides an overview of the franchisor’s advertising and marketing efforts. Also, it provides a description of the training you will complete before opening. Often marketing and sales courses are part of required training.
Financials: This is the meat of your business plan. In this section, don’t only ask for the money you need. Give the lender the big picture of your financial situation as well. Detail how you are going to obtain the entire initial investment. Often times, a lender will not be financing all of the franchise investment. Are you using a mix of personal savings, loans, credit, etc.?
In addition to the funding request, you will be doing some financial projection. Give a reasonable timeframe when the lender can expect full repayment of the loan, and back up that claim with figures. Include graphs and charts detailing the start-up costs, projected profit and loss and projected sales forecast for the franchise.
The franchisor can be of significant help to you in completing this section (via Items 5 and 19 of the FDD, and in direct conversation). However, keep in mind the franchisor is restricted legally about making certain claims about projected earnings. Be conservative with the projections as unexpected delays and unforeseen circumstances do happen.
Appendix: The appendix technically isn’t a part of the business plan, but an additional section to present items that would enhance your presentation. Include items you feel would be necessary to giving the lender a complete picture of you and the franchise you are seeking financing for. Examples include: the resumes of management figures, tax returns, media clippings, etc.
As previously mentioned, the best outside source of information to complete your business plan is the franchisor. No other outlet is going to know that franchise system better. Additional resources include online sites such as Bplans.com, which offers site visitors a substantial library of sample plans to review, as well as general business websites like the Small Business Administration. Prospective franchisees can also use a professional business plan writer, particularly for the review of a plan before sitting down with the lender.
Because business plans contain sensitive and confidential information, the content needs to be safeguarded against potential leaks. To do this, you will need to enter into a Confidentiality Agreement with the parties you allow to review your business plan. The agreement will bind them not to disclose or reveal any confidential information they receive, without your written permission.
Sample Franchise Business Plan
Please note that the example business plan provided is a sample of one way to format a business plan. There are several different acceptable formats, and the contents of business plan sections will vary significantly due to factors including the franchise system, the type and amount of loan sought, the franchisee’s background, etc.
The franchise company information, franchisee background, and financial figures used in this example are fictitious. The charts and sample financial data are courtesy of Bplans.