New View of the Franchise Business Plan

Franchising, by definition, requires standards. A franchise generates profit and controls quality through uniquely defined operating procedures, processes, and policies designed to consistently deliver a product or service to consumers. Multiple teams implement the operating standards in different markets, offering a rich asset of information. To maximize a system’s value, the same type of information exchange and standards should be applied to financial analysis. Franchise systems need a standardized franchise business plan model. This process needs to be driven by the franchisor, with the franchisor providing a usable electronic template for the plan.

Franchising is complicated. Business decisions require constant analysis and assessment of consumer trends, products, services, and operating assets. Each factor impacts the other in complex and multi-dimensional ways. Understanding these interactions is key when forecasting and analyzing financial performance. By using a standard business planning approach, franchisees can exchange, control, and compare complex financial information.

A standard business plan model examines prospective and existing operations. A standard model tests overall fiscal fitness including current franchise operations, new development plans, capex budgets, and alternative financing structures - based on historical performance and current trends. The standards can provide a foundation for evaluating the viability and performance of business initiatives - with assumption values that reflect the specific characteristics of the market and operation.

Standard report formats, structures, and assumption inputs can facilitate system-wide data entry, comparative analysis, simplify operational reviews, and improve communication. We have successfully built business planning models that have achieved broad acceptance by making them as user-friendly and system-friendly as possible. These models are typically developed in widely available spreadsheet software. If so, the franchisor can distribute templates for input, review results, produce forecasts and analysis, and communicate with its financing sources – all electronically, with no barriers to distribution or use.

The following specific information can be entered into a standard financial template:

Franchisee Financial Statements. The franchisee needs enough capital to succeed. The model should analyze short-term and long-term net worth, liquid assets, and contingent liabilities;
Project Costs. The development and/or capex budgets must align with both the concept or service’s revenue generation capability and corresponding financing structure. The model should analyze the market and site-specific development, construction, remodeling, pre-opening and working capital requirements;
Development Schedules. Development pace and schedule directly impacts the franchisor’s available working capital, human capital, and financing capability. The model should assess and test new/future development viability and proforma financial performance;
Financial Performance and Covenants. A concept or service’s ability to generate revenue and deliver profit based on market-specific line item expenses is the foundation. The model should analyze historical financial performance and future forecasted performance based on consumer/market trends, competition and overall expense structure in the local market.
Debt and Equity Structure. The mix of debt and equity impacts covenant performance placing limits on the franchisor’s borrowing capability and impacting overall investor return. The model should assess and feasibility test the growth plan to insure compliance with lender covenant restrictions, financing capability and investor return expectations;

Completed models can be electronically returned to the franchisor for quick review. The model should analyze the specific franchise and financial covenants. Growth plans and development schedules provide a foundation to assess financial viability. Capital projects can be evaluated to determine prospective financial returns. Standardized reports and financial statements can be produced to support both financing campaigns and management review.

Understanding, quantifying, and merging the interactions of these many factors is vital to promoting growth and financial success in the franchise system. The unlimited combination of variables needs to be analyzed in a standard format to insure comparability, simplify assessment of both risk and opportunity, and test feasibility and constraint to drive success.

Support for existing company and franchisee operations. The model should yield an analytical analysis that tests compliance with standard operating covenants and provides standard insight into its financial performance to support profitable operations and decision analysis;
Aid in New Franchisee Selection. The model should analyze the potential candidate’s liquidity, net worth, and credit quality to assess compliance with selection criteria; test the financial capability to support proposed growth, development, and operations through detailed standard forecasts; test borrowing capacity; and test the viability of long-term success while identifying underlying risks;
Financing Growth. The model can provide uniform actual and forecasted financial statements based on assumption inputs, test viability of debt and equity support and capacity, supply project-specific debt and equity presentation materials and corresponding metrics to support application and underwriting;
Return-On-Investment. The model can assess the investment return of a franchise system’s investments, support the identification of the optimal capital structure, and provide insight for decision support.

The benefits add value to operations reviews, new franchisee identification, system growth, and overall financing efforts. An assessment of franchisee capability, financial health, and performance enhances the selection process. Details provide a key foundation for financing the company. Comprehensive financial statements and corresponding analysis comply with lender and investor requirements for application and compliance reporting. Information exchange provides an ever-growing source of data to support continuous improvement. The model can also support earnings claims, franchise lending programs, and, most importantly, success of the overall franchise community.

Take advantage of the financial efficiency and quality improvements that result from a standardized business plan model:

The analysis provides a standardized assessment to support current and future operations. Comprehensive financial statements and key underwriting metrics are assessed providing a valuable financing support tool. The end result is an improved franchise system enhanced by insight, analysis, financing, and opportunity identification, supported by standards – all critical to insuring long-term success.