It’s your responsibility to check out a franchise opportunity before making a commitment, Richard Holden Lloyd’s Banking Group head of franchising, warns
When researching the viability of your chosen franchise opportunity how do you know the financial projections indicated by the franchisor are realistic and achievable?
One of the most effective ways of verifying the validity of the projections given to you by the franchisor is to speak to several existing franchisees.
All ethical franchisors will provide you with a complete list of their franchisee networks, 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.
Ask the franchisor to make it clear to you how it’s calculated the projections in any franchise prospectus or draft business plan. It should tell you whether the figures have been based upon the average performance of the entire franchisee network and how recently they have 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 the franchisor has used assumptions in developing the figures, are they representative of the current market and conservative to allow some leeway?
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 done in your chosen location.
When assessing the financial commitment you are looking to take on, it’s essential to have a good understanding of when the business is likely to reach break even - and when you should expect to see a return on your initial investment.
Your financial projections will include a profit and loss forecast to demonstrate that the business is likely to be a worthwhile venture for you, as well as a cash flow forecast, broken down monthly, which will help you establish how much money you’ll need at the beginning 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.
It’s your responsibility to thoroughly check out the investment opportunity before signing on the dotted line. Don’t just accept at face value what you’re being told without digging deeper.
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