In Australia the franchising sector is facing more scrutiny following various State and Federal enquiries into the benefits of the mandatory code. Franchisors are still wary of providing too much information to franchisees because of the fear of later legal action. Yet franchisees need to understand how the commercial side of the franchise works, so that they can make a sensible decision as to whether to invest.
As franchise advisors we are asked by many prospective franchisees to advise them on the business opportunity they are looking at. In most cases where a greenfield or start up franchise is involved a minimal amount of financial information is provided. Typically this is limited to the prospective franchisee’s initial investment and what the ongoing fee structures are.
These prospective franchisees are often excited about the business concept but have no real idea about the commercial aspects, such as the operating expenses and most importantly how much profit they can make.
After working with hundreds of Franchisors over the last 25 years, Franchise Systems Group has developed a Franchisee Budgeting Tool which can be used by both prospective and existing franchisees.
For prospective franchisees the model requires them input to input data, based on information provided by the Franchisor, based on current operations. In an ideal world the prospect would do this in conjunction with their financial adviser, but even if they prepare it themselves and present it to their adviser at a later date, the adviser now has something concrete to work with, rather than or as well as the often limited information that appears in the Franchisor’s Disclosure Document. The Modelling Tool also has the benefit of presenting the Franchisor’s business in a professional manner which assists the prospective franchisee to look more deeply at the actual potential of the business.
The inputs required focus on the basic drivers of the business and are tailored to create a model based on such key items as estimated sales, cost of goods, staff rosters and costs, operating expenses such as rent, telephones, administration etc. When the assumptions are input the model then cascades into a 5 year plan. This model establishes a budget for each month, which can then be input into the franchisee’s financial software. This then gives a comparison figure for the prospective franchisee from which to produce their monthly and annual operating results.
In order to assist the prospective franchisee and their adviser with the inputs, information can be provided from the existing operations of other franchisees or franchisor operated outlets.
The key benefit to the prospective franchisee in completing the model is that the “prospective or new” franchisee will have developed their own business plan and they will “own” it. The applicants if they proceed to buy a franchise are then much more likely to focus on achieving their financial objectives rather than if the franchisor had merely suggested a range of outcomes. In addition, the franchisor is not providing any “projections”, they are in the position of providing factual information to the prospective franchisee so that they can input their own estimates of how they can possibly perform.
Using the Modelling Tool becomes an essential part of the recruitment process as it will further demonstrate the level of understanding that a potential franchisee has about the business. The franchisor in checking the business plan during the recruitment process will be able to see if a potential franchisee is over optimistic about what they can achieve. Conversely if the franchisee anticipates they can achieve only a moderate performance level, they may, in fact, disqualify themselves.
With existing franchisees the Franchisee Budgeting Tool is expanded and based on their prior performance. The Tool allows the existing franchisee to input their own actual data from previous years as well as key performance indicators information from other franchisees which is compiled and supplied by the Franchisor and embedded in the model. Using the data in this way means their budgeting process can be more accurate.
In order to create a “bottom up” franchise system planning tool we suggest that Franchisors commence the total system budget process in May or June each year for their franchisees, so that by the start of the new financial year, they will have the total budgets for each franchisee and can consolidate them into the total franchised business. This will enable both franchise owners and the franchisor’s internal staff at all levels within the organisation to have targets to work to. Franchisee site visits become more effective as performing to budget becomes the key topic and the most critical performance indicator.
The Franchisee Budgeting Tool can be tailored to be as detailed as necessary for the business whether it is retail or service orientated. The Franchisee Budgeting Tool can include the means of calculating the costs of borrowings, the amount necessary for owner drawings, the development of employee rosters, the importance of controlling debtor days, the need and amounts of extra working capital to cover debtors, the alternative costs of vehicle purchase or leasing, the ramp up of business in the first year of operation, seasonal variations by month, the expected increase in sales and prices over the next 4 years and the expected annual increase in expenses.
The Franchisee Budgetting Tool provides cash flow, bank balance, debt balance and outstanding debtors by month.
As an extension of the Franchisee Budgeting Tool, the Franchisor can utilise the model to produce their own 5 year forecast, taking into account the existing business and new franchisees as they come on board.
Now, more than ever, measuring the performance of franchisees and guiding them to greater profitability becomes an essential part of Franchisor support.