Auburn-Opelika (334) 887-7022 | Montgomery (334) 244-8900

Returning Value Blog

Evaluating a Franchise Business Plan

Posted by Michael D. Machen, CPA, CVA on May 26, 2015 1:04:00 PM

iStock_000038059426_LargeIt is hard to open a business and turn it into a successful operation. Despite the best efforts of entrepreneurs, a vast number of new businesses in the United States fail each year. Instead of starting from scratch, you or another family member, such as an adult child, might search for a ready-made franchise. There are thousands of them in the marketplace, ranging from McDonald’s to Jiffy Lube to Fantastic Sams hair salons.

But how does one evaluate the merits of such a business opportunity? At the outset, it is necessary to go over the franchise business plan with a fine-tooth comb. This document, prepared by a franchisor for review by a franchisee, typically encompasses three main parts: introductory materials, marketing strategies and financial aspects. Here is a brief overview of these items:

Introductory materials: The first few sections of the plan will likely provide some basic information and descriptions. Check to make sure that these materials mirror the materials on the franchisor’s Web site. Investigate the description of the products and/or services offered, the size and nature of the business, and the risk involved.

Typically, this section will describe the management team and their roles in the operation. Again, you can verify this information from other Internet sources. Also, the business plan will likely include an overview of the market you will be in and competitive challenges you might face. For example, you should learn how your projected territory will be divided. Finally, the plan should describe the franchise’s corporate culture.

Marketing strategies: The sections on marketing strategies should answer several important questions, including the following:

  • How will the business develop its customer base?
  • What makes the products and/or services attractive to the public?
  • What is the franchisor’s role in marketing activities?
  • What resources are budgeted for marketing activities?
  • What are the key components of the marketplace (e.g., territory and sector)?
  • What are the marketing plans for the future?

The answers to these questions may help you determine whether the franchise is a worthwhile undertaking for your situation.

Financial aspects: Last, but not least, the financial sections of the franchise business plan provide information needed for a thorough analysis. It is usually divided between two main components: financial projections and financial needs.

  1. Financial projections: This includes detailed income statements, cash-flow estimates and balance sheets for estimated income. Be suspicious of projections that seem too good to be true or are predicted to skyrocket in future years. There should be some wiggle room for downturns or other complications.

  2. Financial needs: The nitty-gritty of the plan covers all start-up and operational expenses. The total amount of capital required, as well as any loans, should be clearly stated. Review this section carefully, and determine if it matches your needs and expectations, considering your willingness to take on risks, your available capital and other circumstances. Note: Exhibits and other supporting items will be attached in an appendix.

For most would-be franchisees, this is not a do-it-yourself proposition. Even if you’re an experienced entrepreneur, rely on expert assistance from your professional advisers.

Looking for more Business Advisory Services? Contact Mike Machen, CPA by calling (334) 887-7022 or by leaving us a message below.

Topics: Business Advisory

Recent Posts