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Franchise Biz Plan: A Remedy for Failure

Each plan needs 5 sections, and franchisors make it easy to fill them out by providing all the info you need. So avoid potential pitfalls. Have a plan.
March 9, 2009
URL: http://www.entrepreneur.com/article/200512

As with any other business, one of the most important elements of a franchise startup is writing a business plan. A business plan forces you to anticipate and answer a number of questions about the challenges you'll face and the expectations you have for your new business. The creation of your business plan is also essential if you're going to need financing from third-party sources, since this is probably the first document they're going to ask you for.

Preparing a business plan is substantially easier with a franchise than it is for an independent business startup since there is so much information already available. During the sales process, the franchisor typically supplies you with a great deal of verbiage you can use to create the narrative portions of the business plan. You can also often find much of the financial information you'll need in the earnings representations of their disclosure documents.

In addition to the sections that are usually addressed, a business plan for a franchise will have a section outlining the track record, personnel and support available from the franchise company. You may include items like the franchise company's sales brochure or FDD as attachments to your business plan. This additional section can provide a much higher degree of confidence for people like lenders that you're trying to impress with your plans.

The five key sections in a typical business plan, whether franchise or independent business, include:

  1. Introduction. This section involves a complete description of the business including an identification of the product or service that will be sold, the size and competitive nature of the market for the business, a description of the operational approach that will be used to take the business to market, and the challenges and risks associated with the startup.
  2. Management. This section describes the key management roles in the new business. It names the people who'll fill the roles and provides background information on these people, such as resumes with prior, relevant experience. In a franchise, you'd also include information about direct support staff of the franchisor in this section.
  3. Marketing. This section defines who your customer is and how you plan to attract him to your business. It includes an explanation of the business's competitive advantages, an examination of the value equation related to the product or service as it relates to potential customers, and of course detailed marketing and advertising plans for the business.
  4. Pro Forma Financial Projections. This section includes income statements, cash flow statements and balance sheets that project the anticipated financial performance of the business when it begins operation. The statements should include extensive notes on all material assumptions used to prepare the projections. These projections should always be prepared on a very conservative basis since it's not possible to project the unexpected delays or challenges that always seem to happen on any new startup.
  5. Financing Needs. Even if all funding comes from your savings, always prepare a section in your business plan related to financing needs. This section involves a complete analysis of all startup costs related to the new business, including sufficient working capital to cover initial marketing plans and operating losses until the projected break-even point for the business. The process of carefully detailing this information, even if you're not borrowing anything from an outside source, will better prepare you for whatever might happen as you get the business set up and operating.

Again, one advantage of a franchise, in relation to creation of a business plan, is that most of this information is readily available from the franchisor. You'll probably find that the franchise company's brochure or website contains sufficient information to complete much of sections 1 and 3 above. You'll also find that its FDD contains much of the information to complete section 5 above and, if the franchisor publishes a representation of earnings in Item 19 of the FDD, then you may be well on your way to completing section 4 above, as well.

Sometimes franchise companies require potential franchisees to start and/or complete their business plans prior to being approved. Whether or not the franchise requires this, it's a good idea to start thinking about a business plan. This will force you to consider options and formalize your projected course of action in the new business. You'll typically identify questions during this process that may not have otherwise occurred to you. You can contact the franchise company and get answers to make sure you have a clear understanding of the franchise prior to making a final decision to proceed.

As a final note on this process, remember to update and finalize your business plan after completing the franchisor's initial training. Regardless of how much research you do prior to becoming a new franchisee, you'll have a far greater understanding of factors like operational and marketing plans for the business after the initial training. Most franchisors will also have pro forma financial models prepared that you can use to double check, or even replace, those you initially developed for the financial projection section of your business plan. Review your entire business plan based on your new knowledge, and you'll be as prepared as possible for your new franchise business to be off and running successfully