THE VALUE AND IMPORTANCE OF THE BUSINESS PLAN
by Richard Holden
A sound business plan is essential if an application to the bank for a loan is to be successful. Richard Holden, head of franchising at Lloyds TSB, explains what the plan must cover.

When selecting a franchise, your decision needs to be balanced with unbiased and factual information. The directory will assist you in building up your knowledge of the franchise systems available and their costs. Further research about the opportunities can be carried out at the BFA website (www.thebfa.org), or by contacting the high street banks that have a dedicated team of franchise specialists.

When your research has been carried out, the information needs to be filtered to establish which franchise systems best suit your individual requirements. This may be based on the level of investment available; previous experience; skills and attributes; the preferred industry sector, and whether you wish to be on your own, or build a business that will employ others.

Your decision is likely to be based on a combination of these and other factors. You should produce a short list of franchise opportunities that you are interested in exploring further. Whatever system is finally chosen it is vital that family and friends are supportive of your plans.

As you make initial contact with prospective franchisors and start to form opinions about them, they will also be assessing your suitability to fit into their network and operate within their system. Good franchisors will award franchises to the most suitable applicants with the ability to successfully develop their business in the chosen territory, and not simply sell to the first person that comes along. They will be selective in their assessment of suitable franchisees and if a franchisor seems too willing to accept you're money, think why!

The level of investment available to set up your business will vary according to individual circumstances. Some people will be able to invest sufficient funds from their own resources and will not require financial support. However, others will only have some of the funds needed to invest in a particular business and will seek financial assistance to get their business up and running. According to the 2007 NatWest/BFA survey, of those who borrow to set up their franchise 82 per cent do so through a bank. So what do banks look for in a request to finance a franchise?

Producing a business plan

The business plan is a vital document for anyone entering business, whether they require the financial support of a bank or not. It is important to the bank in assessing your business idea, and understanding your objectives for the business and its projected performance.

The plan is essential to you in understanding what you wish to achieve and how you intend to do it. It is too important to be left for someone else to write. However, you may wish to seek professional advice when you're drafting it.

Banks can provide guidance as to what to include in the document and accountants, or your local Business Link adviser can support you in compiling the plan. Some franchisors will give general information to assist with the planning.

Remember the plan is yours and you should fully understand all its aspects, including the financial projections before presenting it to the lender. To look at what should be included in the plan, I have broken it down to non-financial and financial elements.

Non-financial elements

- Curriculum Vitae for each business owner or key employee to include the past experience and skills you and they have that are relevant to the business. Also include how you intend to overcome any skills gap through training, or employing staff who have the skills to cover the shortfall.

- What the business does and the market it will be operating in, to include why the product/service is unique, or has a competitive advantage. You should also include an evaluation of the competition, whether it be local or national or, indeed, internet based.

- How you intend to sell your product/service and who your customers will be. Marketing and advertising plans to develop the business to meet the growth projections.

- The operation of the business detailing location, premises, insurance, staffing, suppliers, equipment, information technology, stock control, health and safety.

- Objectives for the business, both short and longer term, as well as a SWOT analysis detailing its strengths, weaknesses, opportunities and threats.

Financial elements

- The personal assets and liabilities, as well as the income and expenditure of the owner/s of the business. The plan should detail your stake in the business and how it was raised. Your contribution may come from savings, redundancy, inheritance, or even from re-mortgaging your residential property. What security you are prepared to offer the lender to support the finance required.

- The gearing is the ratio between the funds borrowed to your cash stake in the business. You will need to raise as much as 30-50 per cent of any set-up costs, including the working capital requirement, from your own resources. Whilst most banks will consider lending up to 70 per cent of the total costs for selected well-established franchise systems, this is not an automatic option. The decision will depend on the ability of the business to generate sufficient revenue to service the level of borrowing requested. The more you can inject into the business from the outset, the less you will need to borrow, and consequently the financial repayment commitment and interest on the debt will be reduced.

- Cash flow is the business's ability to generate cash and is a critical area of any business. A well prepared cash flow forecast is vital to any plan. It will tell you when payments have to be made and when income is projected to be received. If the business cannot generate enough cash at the right time to make its payments, then there will be potential problems. Banks can consider cash flow support to businesses through overdraft facilities or, in certain instances, factoring or invoice discounting may be options to improve cash flow.

- The profit and loss forecast will show what level of profit you expect your business to achieve at the end of a 12- month trading cycle. It will give the detail of your sales forecast and set out all the start-up and operating costs that the business needs to meet. It should be stressed that cash and profit are not the same thing, so the cash flow and profit and loss forecasts are different.

It is important that projections are realistic and it may well be advisable to speak with other franchisees to establish whether the figures can be achieved. Should you decide to speak with others in the system, it is important to find out whether they are operating a comparable business to you in terms of size, premises, territory and staff.

You also need to establish whether their level of drawings from the business would be the same as yours. They may well be single and living with their parents, and have a minimal requirement for drawings from the business. Your circumstances could be very different with a partner, young family, large mortgage and personal financial commitments, which would mean that your drawings would need to be substantially higher.

It is advisable to have some funds to fall back on as a contingency should the business fail to meet the forecasted level of sales or, indeed, if costs and overheads exceed the original projections.

The future

All too often, business planning is given a great deal of attention when businesses are looking for finance at the initial stages and then not looked at again. The business plan should be treated as a working document and never allowed to gather dust. You should regularly review the performance of your business against the plan to check its progress.

Naturally, as the business develops your plan should be updated. Should you need to approach the bank for further finance at a later date, then an updated plan will help demonstrate that you have your finger on the financial pulse. The franchisor will often review your performance on a regular basis as, after all, its success depends on your own success.

Summary

To summarise, the key points to produce a successful business plan are as follows.

- The objectives of the plan are to help raise money and be able to to review the ongoing performance of the business against the plan and alert you to anything that is not going to plan.

- The plan should demonstrate that you understand your business, and that the lender has a good chance of being repaid. Ultimately, banks will only lend to customers from whom they can confidently expect to receive full repayment.

- The business planning process will help you fully understand your business and how you are going to achieve your goals. So you must take ownership of preparing the plan yourself.

- There is plenty of support available to assist you in producing the plan. The franchisor will provide general information about its system and the banks can provide advice on what to include in the document. Accountants and Business Link advisers can offer more specialist support.

- The presentation of the plan is important and you should be able to confidently answer any questions raised by a lender about the business and its projected financial performance.

- The plan will include non-financial information about the particular business, industry, management, marketing and operation. It should also include a cash flow, and profit and loss forecast, as well as a SWOT analysis.

- The information in the plan should be realistic and achievable. Remember, you are the one borrowing the money and ultimately responsible for its repayment.

- Richard Holden is head of franchising at Lloyds TSB and leads the team responsible for maintaining and developing the bank’s relationship with the franchise sector.

The franchise team provides a support role to the bank’s business centres nationwide on all aspects of franchising, particularly helping them assess borrowing requests from prospective franchisees by maintaining a comprehensive database of opportunities in the marketplace.

The team also provides help and guidance to existing and prospective customers who are considering franchising as a route to expand their business.

Holden can be contacted at richard.j.holden@lloydstsb.co.uk

© 2007 Franchise World

Reprinted from the Franchise World: 2008 British Franchise Directory and Guide.

 

Bank franchisee finance package A loan scheme by banks to provide the franchisee with some of the finance to buy a franchise, and set-up and operate the business. Usually, restricted to a maximum of two-thirds of the total investment (larger loans are sometimes available from finance houses) because of the need by the lender to:

(a) to see the franchisee put its own money into the business as a way of ensuring its continuing personal commitment, and

(b) to avoid the franchisee having to face too high a burden of debt.

The banks have off-the-shelf, tailor-made packages for specific franchisors they have evaluated, usually those which are well established and in which they have experience of lending to their franchisees. The packages are usually made-up of different types of facilities (term loans, overdraft, equipment leasing, etc.) to suit the particular requirements of each franchise scheme, and they are normally administered through the bank's branch network, under the guidance of the bank's head office franchise department.

The banks emphasise that their normal lending criteria apply to applicants for their packages, and that the existence of a package should not be construed as any form of warranty by the bank of the viability of the franchise.

See also
PROJECTIONS - FACT OR FICTION
by Lorna Smith
A guide to understanding the financial projections put forward by the franchisor. Lorna Smith is franchise manager of HSBC Bank.