Head of franchising for the Lloyds Banking Group, Richard Holden’s top tips make sound financial sense
When examining the viability of a chosen franchise, how do you know the financial projections are realistic and achievable?
One of the most effective ways of verifying the validity of the projections given to you by a franchisor you’re considering investing with is to speak to several existing franchisees.
All ethical franchisors will provide you with access to their franchisee network, so you can contact them to find out what they have experienced and whether the financial projections indicated offer an accurate forecast as to the likely trading performance of the franchise.
Make it clear
Ask the franchisor to make it clear how it’s calculated the projections in any franchise prospectus or draft business plan. It should tell you whether the figures are based on the average performance of its entire franchisee network and how recently they’ve been updated.
Figures produced in a better economic climate may bear no resemblance to what a business can achieve in more challenging market conditions. If they have used assumptions in developing the figures, are they realistic and conservative?
The franchisor may give you a draft business plan with typical financial projections. However, this is only a starting point for you to build your own forecasts, taking into account the local market research you’ve undertaken in your chosen location.
When assessing the financial commitment you’re looking to take on, it’s essential to have an excellent understanding of when the business is likely to reach break even and when you should expect to see a return on your initial investment.
Profit and loss
Your financial projections will include a profit and loss forecast to demonstrate that the business is likely to be a worthwhile venture, as well as a cash flow forecast, which will help you establish how much money you’ll need so you don’t run out of working capital along the way.
Additionally, a projected balance sheet will give you a snapshot of the financial health of the business at the end of the first year.
Together, these three documents should give you a clear understanding whether the investment in your chosen franchise makes financial sense.
Of course, the likely financial returns are not the only consideration when investing in a franchise and thorough research is essential in selecting the right franchise for you.
It is, however, essential that you invest some time researching and understanding the financial aspects of the business opportunity to reduce the likelihood of the business failing.