A Business Plan Should be a Requirement for Buying a Franchise

Visit any website that offers advice on starting a new business or expanding an existing one and you’ll find articles and advice on the importance of writing a business plan. There are tips ranging from how to write an effective business plan to the reasons why it’s so important.

During my early years in the franchise industry, I spent time meeting with and evaluating franchise candidates. I can recall only a small number of these candidates submitting a business plan. However, I had always felt that the process of writing a business plan was valuable for an individual on the cusp of purchasing a franchise. As a result, during my career as a franchise executive, I instructed my franchise sales team that it was a requirement of all candidates at a particular stage in the franchising process to submit a business plan.

I believed then and continue to believe today that the process of writing a business plan should benefit both the franchise candidate and the franchisor. Why don’t more individuals write a business plan as part of their franchising process? Perhaps it’s the result of the belief by some that buying a franchise has far fewer risks than starting up a new business, which is not universally true; since franchisees and franchisors do fail. 

I would advise every franchise candidate to write a business plan before signing the franchise agreement and for their part franchisors should require an individual to submit a business plan before receiving final approval for a franchise.

Here are ten reasons why a prospective franchisee should write a business plan:

  1. The process of writing a business plan requires focus and attention on the key details of a franchise operation
  2. A business plan serves as a form of checklist for opening, operating and growing a franchise
  3. A key component of a business plan is the competitive climate and potential challenges in the marketplace
  4. Constructing pro forma financial statements and cash flow projections will require financial data gathering from the franchisor and existing franchisees
  5. The financial models require the franchisee to obtain cost and expense data pertaining to staffing levels, supply and product costs and other operational expenses.
  6. In the absence of an earnings claim by the franchisor a franchise candidate could at the very least construct revenue and income projections
  7. Establishes key milestones for franchise financial performance ranging from break even to profitability
  8. A business plan is necessary in order to obtain funding from a lender
  9. A comprehensive way to evaluate the franchise opportunity by raising numerous questions
  10. Provides a document that franchisor staff and franchises can review and comment on. The type of response from a franchisor might provide an indication of how committed they are to their franchisees

Individuals that have an interest in purchasing a franchise should construct a detailed business plan. The process of constructing a business plan will require the candidate to dig deeper into the franchise operation. In order to lower the risk of franchisee failures franchisors should make it a requirement of franchise candidates to submit a business plan.

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Comments

Franchisees need business plans

I agree with you completely. The problem is that franchisees are encouraged by franchisors and their sales agents to make emotional decisions, not business decisions. Most franchisors still do not provide financial performance information on their current franchisees or company outlets, leaving franchisees with a difficult research project if they want the basic numbers that form the foundation of the financial portion of a business plan. Franchisees are told they don't need to know anything about the business--"we will teach you everything you need to know" which leads many to assume the franchise system is so well developed that all they have to do is follow the franchisor's plan.

Unfortunately, until the industry starts sending a vastly different message to prospective franchisees about the nature of their investment and the risks involved, very few franchisees will take the time and effort to do their own business plan.

Howard Bundy
Bundy Law Firm PLLC
Kirkland, WA

Of course franchisees need a business plan,

every business investor needs one and they need to sit down with their accountant every year and review it and hopefully update it.

But a business plan isn't going to make investors successful if they don't work it or if their due diligence was weak and they made a poor choice of franchisor. An abusive franchisor will trump any good intentions every day.

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