Of course, this goes without saying – or does it?
I am surprised by the number of businesses that have decided to Franchise but have not done a thorough financial analysis beforehand. This is crazy!
For franchising to work in your business it is essential that it works for all parties – think about the 3P tension which is the balance between client – business owner – staff. (I referred to previously). It needs to be a better outcome financially for Franchisees, clients, and of course your own business.
So being clear on this requires a detailed financial analysis – there is no other way.
So as part of the Validation process, we do with businesses, we help you build financial viability and analysis, using a model we have created to answer the questions above.
The place to start here is looking at how the numbers work for a potential Franchisee:
- What are you going to sell the franchise for?
- What is the revenue split/royalty payment from them to you?
- Are there other support fees they will pay?
- What about marketing costs and fees?
- What will their expenses be to operate their business?
- For different levels of revenue how much time will they need to work in the business?
- What is the return of investment (ROI) for them going into your franchised business?
This process is normally a modeling one based on historical data as well as assumptions as to what the franchised business model will look like.
Once this has been done and the numbers appear to make sense for a franchisee to come into your business model then you can look at what that will look like for your business.
Make sense? – What does that mean? We always look for a return of investment for a franchisee in the range of 12 to 18 Months based on their investment to get into the franchised business.
What this requires is building out a detailed operating forecast for your business in year 3 after you have moved your business over to the new business model and have several Franchisees operational. Your business expenses and operational model will be different so this needs to be taken into account in this modeling approach.
At this stage, you want to approach it more conservatively rather than optimistically to give it a good shaker down.
When dealing with business owners doing this process I find that typically they have done this process, overestimate what they can sell a franchise for and the net income a franchisee can make. This sets an unrealistic framework for the model right from the start.
This then is the way we can test and validate any changes that are made to the model as you build and roll it out. Always keeping your eye on the ball and not drifting from the game plan.