When looking to invest in a franchise, once you have completed all your research and opted for the brand you wish to proceed with, your franchisor would expect you to be able to produce a business plan to outline how you will be successful in your territory.
Your business plan should outline what you want to do, how much money you need to do it with and how you plan to pay the money back. It should also include a Profit Forecast and Cash Flow model.
Author: Suki Dehal, Head of Franchising at Lloyds Bank
However, there is more to the business plan than getting funding. It will help you clarify your ideas and objectives. You will have to answer questions on your business objectives, your product or service, pricing methods, your customers and competition. The business plan should be your guide to how you are going to be successful, which will require updating periodically once you launch your business.
This is crucial to ensure you remain successful as after you open the business there will be changes in your marketplace with both competition and opportunities that you will need to plan around to continue your success moving forwards.
Many franchisors will assist in the preparation of a business plan, but remember that it is your business and your business plan. This is important as we have seen in recent years that some franchisees have minimal involvement in the production of the business plan, which becomes apparent when discussing the plan in depth with potential lenders.
Having an active involvement in the creation of the plan will allow you to ensure that the plan reflects the demographics of your locality and how you will grow your business successfully against any existing competitors.
Preparing, presenting and defending your business plan is a real test of your business acumen. Producing the plan tends to bring everything out into the open, focuses your mind on all elements of the business, and helps put your thoughts down in black and white.
When discussing the plan in depth with lenders, they will inevitably look to challenge you on the statements made. This isn’t to try to catch you out, but rather it’s a lenders way of gaining confidence in your business acumen and your ability to deliver what’s on paper.
Common stress tests would involve asking to see how your ability to repay borrowing would be affected by increases in Bank of England base rate throughout the term of the loan. Or by asking if break-even point was pushed back by six months, would the business have sufficient cashflow to continue to grow?
These are some of the common stress tests that banks will use when reviewing your business plan, therefore having an active involvement in the development will allow you to answer confidently to secure the funding needed to launch your business.
Your business plan is the ‘sales document’ for you and your business. It’s preparation and presentation should project the image you want for your business. Its content should be clear, concise, to the point and divided into logical sections. Most franchisors will have developed their own template that you can use to produce your plan, or alternatively they may work with a separate organisation to support you in the production of the plan. Either option is acceptable for lending purposes and I have outlined the broad sections below:
1. Introduction
- Describe the purpose of your business, briefly outline the concept.
- Include your overall business objectives.
- Outline your personal motivation for selecting this business.
- Decide on the ‘legal status’ of your business – sole trader, partnership, limited company or co-operative? All have benefits and shortcomings. Find out which is right for your situation.
2. The product or service
- Describe precisely the product or service that your business will offer. Include any relevant history of the product or service and try to avoid any jargon.
- List the distinctive qualities of your product or service and describe your ‘Unique Selling Point’ (USP) – the key feature which makes your product or service stand out in the market place.
- Describe how your product or service can be developed in line with a changing market.
3. The personnel
Any business is only as good as its people. You should include details of anyone who will be involved in making your business a success. These people are a very important asset and this is therefore a key section of your business plan. Include in this section:
- Firstly outlining your own skill set is essential to demonstrate how you will be successful in this franchise. Most franchisors will promote what skills their ideal franchisee candidate will possess, therefore use this section to bring your CV to life and explain why you feel you possess the right skills to replicate the success of other franchisees.
- Franchise lending banks will know that sector specific skills generally aren’t required for most franchise brands and they will be looking to evaluate your transferrable business skills from your working career to date. Depending on the brand you opt for there will be different skills requiring different levels of importance.
- Also include an overview of each person essential to the business, including their personal assessment of their attributes, strengths and weaknesses as well as your own assessment of each person.
- Their relevant experience, commitment and reasons for involvement in your new venture.
- You should also include a detailed CV for each person in the ‘Appendix’ at the end of your plan.
4. The market
This is probably the most important section of the whole plan – without a clearly defined market your business will not succeed. If you can show that you have done your homework in this section, you will gain credibility for the whole business plan. Your franchisor will also have research in this area to support this but your own local knowledge will be essential to bring the details to life:
- Describe the current conditions in the marketplace for your product or service, in terms of what makes you feel that the area is suited to react well to the introduction of your business.
- Detail any relevant facts and figures relating to the market sector(s) that you will be targeting – for example geographical location, size (in terms of people and money), expected growth, and the type(s) of potential customers for your product or service.
- Demographic reports can be critical to ensure that the new territory contains sufficient opportunity to build a successful business to replicate the success of others. This may be determined by the number of people of a certain age, number of households or even number of vehicles, naturally dependant on the type of business you are looking to launch.
- Give details of your competitors and explain why your potential customers will choose your product or service rather than the competition. It is important to make sure that you complete thorough research on each competitor to be clear about each of their strengths and weaknesses which gives you confidence about your own position in the marketplace. This can be completed via mystery shopping and researching online reviews and testimonials to gain an in-depth look at the existing performance of competitors. This is the point where research pays off. You should make use of the wealth of business information that is available about markets, competitors and customers, as this will be crucial to ensure your own success.
5. The marketing plan
A business without a marketing plan is like a ship without a rudder. Your company must therefore have a clearly defined marketing strategy, which will include:
- Your marketing objectives – for example number of sales or market share. Clearly identify what level you are looking to achieve and in what timeframe. This can then be compared to existing franchisees performances to ensure that your projections are realistic.
- Where your product or service will be ‘positioned’ in the marketplace in terms of price, quality, image etc. This will ensure that you can clearly identify your USP and how you will compete effectively in your locality.
- What your planned marketing communications are – advertising, leaflets and brochures, etc. Most businesses will use a blend of difference activities, however its important to identify how much you are looking to budget to each of your mediums to ensure that you will have sufficient cashflow to achieve your growth ambitions.
- How your product or service will be distributed and /or sold, for example, through agents, sales teams, etc. This will be important to help define what margin you will realistically achieve for your goods depending on which route to market you opt for.
- What customer care policy is planned and how it will work. In modern business customer service is crucial to ensuring loyalty and growth within a business. It would be essential to identify how you will manage your customer database to ensure that you are able to foster ongoing loyalty and brand advocacy from your customers. This can be done in a variety of methods including social media, loyalty cards, discount codes, etc. Clearly identifying your care strategy will enable you to plan repeat sales into your forecasts confidently.
- Any interest that you have already generated or details of possible orders you have already taken should be include in the ‘Appendix’.
Without a clearly defined marketing plan your business will not succeed.
6. The operation
Having an efficient operation can be the key to a profitable business. This section should describe how you will supply your product or service. Your franchisor will have set systems that you will have to adhere to. These systems will provide you with a lot of the information needed to populate this section and ensure it is relevant for your own local area.
- Include your sources of supply, resources and materials. Ensure that you have a clearly identified supply chain so that you can be confident of what gross margin you can achieve.
- Detail how you will look to recruit the necessary staff to grow your business effectively. Recruitment has become a challenging area for many businesses following the impact of both Brexit and Covid on the labour market. It is important to identify how you will look to source candidates suitable for your business and how you will make your offering attractive to recruit the necessary staff needed to be successful. Is your base salary competitive with equivalent businesses in your area? Ensure sufficient research is done into the labour market of your area to know that your offering will be competitive.
- The same question will apply to senior positions you recruit for, will you use a recruiter to find these people? If so, ensure that costings are included in your projections and projected salary is competitive with the market place. Also given current inflationary pressures ensure that the wages will include periodic rises each year to ensure the business remains competitive.
- Detail the resources required to operate your business, differentiating between what you already have and what you need to acquire.
- Identify any critical procedures or sensitive issues and outline possible alternatives. Most franchise businesses will have prescribed which CRM system the business must use and any ancillary services around it. Ensure that these systems costings have been included accurately and that they have sufficient usage capacity for your desired team size.
- State where you intend to operate from – your current premises and future requirements.
- Outline your current Health and Safety policies – if you don’t comply with your statutory obligations, you will need to take action. Again your franchisor will normally be able to support you with this, some will have an outsourced partner for HR matters, whilst others will handle in-house with their own dedicated resource. Ensure that a member of your team takes full ownership of ensuring compliance in this area.
7. The premises
You need to decide on the most appropriate premises for your business needs together with the franchisor. Whether you are working from home or looking for factory premises, you need to consider the following:
- Location – to whom do you need to be in close proximity, customers or staff? Ensure that the location is accessible for your desired audience and has sufficient transport links/parking facilities if needed.
- Future business growth – how long will the premises provide ample space for the businesses growth? Can additional space be bought or will a full move need to be completed when the business reaches a certain size.
- Running costs and uniform business rates – ensuring premises are affordable is essential to make sure that cashflow is sufficient for the growth ambitions of the business.
- Insurances.
- Planning consent.
8. Financial information
1. (a) Introduction
Start with a summary of the key facts:
- The forecast profit (or loss) for the year.
- Whether financing is required and if so, how much and where your own contribution is to come from.
- The ‘break-even’ sales for the business should be calculated and shown as a percentage of your anticipated sales.
- Details of the money you need to take out of the business to live on – ‘your required income’. Ensure this is a reasonable level that correlates with your existing personal account statements.
- A detailed schedule of your required income should be included in the ‘Appendix’.
1. (b) Profit & Loss forecast
Your forecast profit (or loss) should be based on your anticipated sales, minus your direct costs and overheads. The assumptions made in producing your forecast should be listed:
- Include as much detail as possible to justify anticipated sales. This should include how other franchisees in territories of a similar demographic have previously performed in order to give credibility to your projections.
- Any direct costs (materials etc.) should be detailed.
- Don’t forget your overheads – it is just as important to show how they have been calculated. Again, by looking at other franchisees you will be able to anticipate what level of overheads is reasonable for each stage of your business growth.
1. (c) Cash flow forecast
Cash will flow in and out of your business – often at different rates and times, for example, you may have to pay for materials in advance, yet wait months for payment after you have sold your product or service.
Situations like this can lead to cash flow problems in an apparently profitable business. To anticipate how much cash your business will require, you should convert your profit and loss forecast into a cash flow forecast. List your assumptions:
- When will you get the money from sales.
- When will you have to pay suppliers.
- The timing of specific overheads.
- How much capital equipment that you require for your business. Differentiate between existing equipment and expenditure still to be made – how much and when.
- Properly done, this will tell you when your business is likely to be short of cash and it will enable you to plan for this.
Finally it’s important to articulate the security being offered against the borrowing if necessary. Different lenders will have different levels that they can lend to on an unsecured basis. Currently at Lloyds Bank, we would look to discuss what potential security can be offered when we look to lend more than £25,000 against the business. Typically in the first instance we would look at property owned by the business or the directors that has equity available to secure the new proposed borrowing against.
If you don’t have sufficient equity available in your assets to secure the borrowing against, you may be able to secure the borrowing using a government scheme like the Recovery Lending Scheme to raise the necessary level of finance. The key here is to link in with your bank manager to discuss viable options for your business plan.
To conclude your business plan you should be able to summarise your findings from all of the sections above and why they give you the confidence that your business will be successful. Following the completion of the plan, whichever bank you look to obtain funding from will look to review your plan and financials, along with other supporting information.
Typically banks will ask to view your personal bank statements, to ensure that personal commitments are being met without pressure. They will also look at top view proof of the origin for your contribution towards the business. This can be in the form of bank statements. Banks will also look for a breakdown of your personal finances for your household, outlining all assets, liabilities, income and expenditure.
Following these steps will ensure that your business plan is robust and complete across all areas to ensure that lenders will be able to provide faster decisions to support your business goals. Please feel free to get in touch with banks who can support you in the planning phase when you have decided on the brand you wish to pursue and ensure you complete plenty of research to make sure that your goals are realistic and achievable.
About the author
Suki Dehal is Head of Franchising at Lloyds Bank. He has 13 years banking experience, including seven in franchising.
Dehal is responsible for providing support to the Lloyds Bank Business Managers, assisting them in assessing proposals from prospective franchisees and ensuring that they have up-to-date information on the franchise systems operating within the UK.
He also works closely with franchisors to understand ongoing performance, training and support offered and any other developments that may affect the network.
Understanding the benefits of franchising, Dehal and his wife are now franchisees themselves, buying a Home Instead in their local area. This allows him to bring another perspective into the industry and to Franchisee Awards.
Suki Dehal is Head of Franchising at Lloyds Bank. He has 13 years banking experience, including seven in franchising.Posted: 25th October, 2022