How to Evaluate a Franchise Business Plan
When Harland Sanders sold his first Kentucky Fried Chicken franchise in 1952, the document he prepared for the first batch of franchisees was a mere two pages in length. Things have changed a lot in the intervening years. Today, the extremely rigid Franchise Disclosure Document, which is proffered by a franchiser before any agreement is pursued, must contain a preordained list of 23 items. Most franchise agreements run 75 pages or longer.
Compared with these highly-formatted documents, a franchise business plan tends to be much shorter and focus on the dream. It is prepared by the franchisee as an introduction to and overview of a business opportunity and can therefore be more flexible, says Gary Castrogiovanni, a professor at Florida Atlantic University's Adams Center for Entrepreneurship.
Much like any traditional start-up business plan, a franchise plan should provide a company's vision, a financial analysis, and a marketing plan. The main difference is that it must address in detail the economics of both the franchiser and the franchisees – and show how the parent and its affiliates will be able to make money together. Here's how to read a franchise business plan with a trained eye.
Dig Deeper: Running a Franchise
Evaluating a Franchise Business Plan: The Basics
As with any business plan, you should expect to see several sections laid out in a franchise plan, including most vitally an introduction (or abstract), a management overview, a marketing strategy, detailed financial projections, and the financial requirements for investing in a purchasing a franchise. Although it's easy to breeze through the first three sections, which lack financial projections or detail about your involvement as an investor, they can yield crucial information and you should spend time reviewing them.
First, you will want to see if any material on the franchisor's website differs from the material in the business plan. If there's a discrepency, you should ask about it—not in a gotcha kind of way, but rather to gain insight into how a plan may have evolved. You also want to make sure many elements of the franchise's strategy match your company's culture and style. Keep an eye out for the business plan's description not only of the service and products involved, but the size and competitive nature of the business – and the challenges and risks involved. The business plan should be frank, thorough, and in tune with any additional research you've done on the market.
Next, you'll typically come to a description of the management roles in the franchise, including information on the people who fill those roles in biographical form. Again, you might want to do additional research – even just spend a few minutes on Google – to learn more about and verify the backgrounds of everyone involved.
Where you would normally find industry analysis in a business plan, most franchise business plans typically include a franchise overview, along with a description of the market the franchise would be entering – and its competition. These should be thorough, and lead seamlessly into a marketing plan. The plan should specify how territories will be carved up, and how many locations per territory a franchisee will be allowed or expected to open.
Finally, a franchisor should convey a sense of culture and personality in his or her business plan. Look for a franchisor to display confidence and ambition as well as a sense of loyalty to the prospective franchisees in the proposal.
Dig Deeper: The Complete Franchise Business Plan
Evaluating a Franchise Business Plan: Will the Marketing Strategy Work?
The next section of a franchise business plan will deal with the franchise's marketing strategy. How is the business going to attract new customers? Why will the product or service seem attractive to customers? What role do you as an owner or investor need to play in funding and facilitating local marketing? This section should answer those questions. It should also include detailed advertising plans for the future, including time frames, budgets, and specific marketing tools to be employed, says John E. Clarkin, a professor of entrepreneurship at the College of Charleston.
"In other words, how much is the franchiser responsible for buying TV ads in the market, or being responsible for introducing the franchise into a market where no one knows about it," Clarkin says. "That latter plan can include a lot more money involved."
What else to look for? Has the plan's creator done his or her market research – or worked with a firm to understand the specific market (regarding both geography and sector), and its challenges? If so, are the solutions the plan proposes viable? Look for the business plan to cite specific evidence to convince you that the franchise's sttrategy is likely to both reach and attract customers.
Dig Deeper: Writing a Marketing Plan
Evaluating a Franchise Business Plan: Understanding and Evaluating the Financial Details
The financial section of the business plan should provide a franchisee with information about the investment necessary to be successful, as well as the expected return on that investment.
The financial section is typically divided in two parts: Financial projections and financial needs. In the first section, you should find detailed income statements, cash-flow estimates, and balance sheets for estimated income. As a would-be owner, you should be wary of projections that seem unreasonably high, or that ratchet up too quickly. Rosy projections suggest the franchisor has not left enough room for the sometimes-inevitable snag, delay, or complication.
The second section on needs should include a thorough tally of all the costs involved in starting up a franchise, including the initial capital needed to cover early marketing expenses as well as the operating losses incurred during the start-up phase. The breakdown of marketing funding should be re-evaluated here, and the total amount of capital needed from both parties should be clearly laid out. Any loans need to be included, including what the franchisee is expected to put on the line.
You should appraise the plan's financial sections carefully, and see how the expectations map to your financial resources and life goals. "If someone is thinking of entering into business ownership for the first time, they should be able assess how much liquid cash they are willing to risk, and what their lifestyle goals are, and whether they have an exit strategy," says Anne Barr, president of the Dallas-based advising firm Franchise Opportunity Specialist.
(Other documents related to personal and business finance should come attached in the "exhibits" appendix at the back of the plan. These are designed to provide supporting information and detail, and they are definitely worth a look.)
Dig Deeper: The Financial Section of a Business Plan
Evaluating a Franchise Business Plan: Additional Resources
- The Federal Trade Commission's guides and rules regarding franchising, including a consumer guide to buying a franchise.
- Franchising & Licensing: Two Powerful Ways to Grow Your Business in Any Economy, by Andrew J. Sherman. 2004.
- Anatomy of a Business Plan: A Step-By-Step Guide to Starting Smart, Building the Business, and Securing Your Company's Future, by Linda Pinson and Jerry Jinnett. 2008.
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