Beyond the "Glee" Stage: Proper planning serves franchisors and franchisees

According to Greg Nathan in The Franchise E-Factor, the early stages of owning a franchise—the “glee” stage—are filled with optimism. However, the reality is that many franchisees either fail or underperform due to inadequate planning. The key to success is often having both a business plan and a financial plan.

Early road map

Most business plans are created by existing businesses to secure financing. However, they should be developed early to provide a road map for success.

In the excitement of purchasing, many franchisees overlook critical financial needs, such as day-to-day operational costs and working capital. I learned this lesson firsthand when I bought my first franchise. I relied too heavily on the franchisor’s information. Fortunately, I had the necessary capital to sustain the business during its early phases, but I realized that many others might not have been so lucky. This experience highlighted the importance of not underestimating the capital requirements and ensuring full transparency.

A business plan requires essential elements:

• Company description. The market needs your business fulfills and its unique competitive strengths
• Products or services. A detailed description of what the business offers and how it benefits customers
• Market analysis. An examination of industry trends, market size, projected growth, and target demographics along with a competitor analysis, including a review of competitive businesses operating in the same region
• Organization and management. The business’ structure, ownership, and profiles of the management team
• Timeline. A road map of steps necessary to open and operate, including dates
• Training. Plans for training the franchisee and staff
• Marketing and sales strategy. A plan for attracting and retaining customers, covering both franchisor-led and franchisee-specific marketing efforts
• Financial projections. Detailed forecasts, including income statements, cash flow statements, and balance sheets for three to five years
• Appendix. Resumes, permits, legal agreements, etc.

A solid business plan serves multiple functions. For one, it builds trust and confidence in the franchise opportunity. As potential franchisees create their plan, they gain an understanding of what running the franchise entails. This process fosters confidence in their ability to succeed and builds trust in the franchisor’s transparency. Additionally, a business plan aligns the expectations of both the franchisee and franchisor. By defining operational and financial realities, the plan reduces potential future conflicts. Finally, a business plan helps to evaluate the viability of the business based on market conditions and the required operational and financial support. It encourages franchisees to ask questions and collect data, further increasing their confidence and chances of success.

Financial planning

A financial plan typically includes:

• Profit and loss statement (P&L). Shows the projected revenues and expenses over time
• Balance sheet. Outlines the business’ assets, liabilities, and equity
• Cash flow projections. Provides a forecast of the cash that will flow in and out of the business, factoring in rent, payroll, royalties, advertising, and other franchise-related costs

Franchisees should develop both conservative and aggressive financial plans to account for different potential outcomes. By doing so, they will be financially prepared, ensuring that they have adequate funding in place to cover all business needs. The financial plan also plays a key role in securing financing. While franchisors cannot directly assist in securing loans, they can provide valuable guidance on what lenders look for, such as strong financial projections. These projections, supported by realistic estimates, give franchisees a solid foundation when applying for loans.

Tools for success

Having a business plan and a financial plan serve more than just operational needs; it also significantly increases the likelihood of success. Franchisors should encourage potential franchisees to develop these plans early and thoroughly, ensuring that all parties involved are well prepared for the challenges and opportunities ahead. A successful franchise system ultimately depends on the profitability and success of its franchisees, and careful planning is the cornerstone of that success.

No franchisee should proceed without solid business and financial plans. These two critical documents will ensure that they have the resources and understanding necessary to run their business effectively, improving their chances of long-term success and profitability.

Planning at onboarding

A business plan doesn’t just help during the sales process. It’s also a key tool in the onboarding phase, allowing the operations team to coach the new franchisee effectively. A well-thought-out plan can serve as a road map for success, ensuring that both parties are on the same page from the very beginning.

A business and financial plan together start the process that will greatly increase the likelihood of the franchisees’ success and profitability, which is the ultimate goal of a successful franchise system.

Evan Hackel is CEO of Ingage Consulting and Delta Payment Systems and an advisor to Tortal Training. He is a thought leader in the fields of leadership and success and an author, speaker, and entrepreneur who has been instrumental in launching more than 20 businesses and has managed a portfolio of brands with system-wide sales topping $5 billion. He is the creator of Ingaged Leadership and author of Ingaging Leadership Meets the Younger Generation. Reach him at [email protected], 781-820-7609, or www.evanhackel.com.