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:
- The process of writing a business plan requires focus and attention on the key details of a franchise operation
- A business plan serves as a form of checklist for opening, operating and growing a franchise
- A key component of a business plan is the competitive climate and potential challenges in the marketplace
- Constructing pro forma financial statements and cash flow projections will require financial data gathering from the franchisor and existing franchisees
- The financial models require the franchisee to obtain cost and expense data pertaining to staffing levels, supply and product costs and other operational expenses.
- In the absence of an earnings claim by the franchisor a franchise candidate could at the very least construct revenue and income projections
- Establishes key milestones for franchise financial performance ranging from break even to profitability
- A business plan is necessary in order to obtain funding from a lender
- A comprehensive way to evaluate the franchise opportunity by raising numerous questions
- 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.