Suppose you’re considering buying a franchise and you’re facing any of the following situations:
- You need to source funds for your project.
- Your franchisor is asking you for a financial plan.
- The SBA wants to see your numbers.
- Your bank wants to know if you can pay off the equipment loan.
- Your landlord wants to see if you will be able to pay the lease.
- Uncle Lenny wants to know how you will pay him back.
- Most importantly, YOU want to see what your franchise looks like from a financial perspective before you decide it is the right opportunity.
If any of these apply, then you need to generate your franchise financial projections. Keep reading.
Typical franchise financial projections range from start-up through 60 months. These include an income statement, balance sheet, cash-flow statement, and supporting assumptions.
Putting franchise financials together can be a difficult task for even seasoned business people. Projections can be especially daunting for those who have never done them before or lack the sufficient financial background.
Most franchisors provide sample financial projections for a typical franchise unit as part of their Franchise Disclosure Document. While these are a good start, you will need to customize your projections to your situation. Expense assumptions for a suburban franchise can be very different than those for a downtown urban location. Your franchise may have more (or less) competition in your specific area. There are many factors that make your situation unique.
Well-constructed financial projections will allow you to run different scenarios: what if I increase my prices, decrease staff, buy more equipment, increase square footage, or increase membership or units sold? Having this ability is the key to understanding your franchise’s performance potential and its possible pitfalls.
Once you are comfortable with your financial projections, you will have a much better understanding of the revenue and expense elements that drive your business. You will know how much money you will need to start and operate the business until it can stand on its own. You will know your staffing requirements and expenses. You will know your investors’ potential returns. You will know if you can pay back Uncle Lenny. You will be able to answer key questions regarding your business.
Sound financial projections allow you to judge your progress as you roll out your franchise. Sound projections assist you in hopefully avoiding the dreaded situation of not having raised enough money. Sound franchise projections help you succeed.
Your task list:
- Review your Franchise Disclosure Document and understand the financial terms.
- Research your local market (labor costs, rental costs, utilities, competition, pricing).
- List and estimate your start-up and operational expenses in as much detail as possible.
- Estimate your key assumptions (pricing, growth pattern, cost of goods, staffing plan, etc.).
- Muster and tally your potential funding sources (savings, relatives, SBA, investors, bank loans).
- Draft a personal financial statement. Know your credit scores.
- Draft your detailed financial projections. Have an experienced person check for accuracy and sanity-check your assumptions.
Cayenne Consulting has in-depth experience in advising franchise businesses. We have generated financial projections for many successful franchisees. If you need help, Cayenne will work with you to build and customize your franchise financial projections for your specific situation.