Financial advice
Better business plans
Franchisors are saying that the banks are not lending, banks are saying that they are, so what's the real story? Cathryn Hayes uncovers the truth behind tale
Potential franchisees are likely to be considered more favourably for finance than a conventional start-up because of the lower risk involved.
For an established franchise, most of the major banks will lend up to 70 per cent of the start up costs, for new franchises the figure will probably be around 50 per cent.
Franchisees will need to prepare a comprehensive business plan, together with financial forecasts to support their request for finance. As their franchisor, you will probably need to help with this, but the franchisee should understand the figures and own the business plan.
The business plan will clarify the main business idea of the chosen franchise and define the long-term objectives. It provides a blueprint for running the business and a series of benchmarks for both you and the franchisee to check progress against.
A good business plan will contain the following:
Summary business description: Details of the franchise being purchased and the financial needs.
Market analysis and product/service: Research and identify local competition and assess what the likely demand of the product/service will be in the specific territory.
Market strategy: Outline intentions for marketing the product/service and how the sales figures shown in the projections will be generated.
Management plan: Include details of the type of business (eg, sole trader, limited company) and CVs of key personnel. Set out the structure and key skills of the management team and staff.
Financial data: At least two years projected figures are required, including a balance sheet, cash flow and, profit and loss statement, ensuring that projections correspond with the information outlined above and they're realistic. If it is a resale franchise, include details of the existing business being sold and a copy of previous years' accounts.
SWOT analysis: A one-page analysis of strengths, weaknesses, opportunities and threats.
There are some common errors or omissions that sometimes leave viable business opportunities struggling to raise the finance needed:
Other sources of income
Lenders always worry about the ability of a new franchise to provide enough income for the owner to live on and service any borrowings they have, particularly in the early years. Luckily, many franchisees have a supportive partner behind them who often continue to earn a regular wage. This additional household income reduces the franchisees' dependence on the profits of the business. It is therefore important that a franchisee provides a summary of all their domestic income and expenditure, demonstrating just how much money needs to be taken out of the business in order for them to survive.
Understand the figures
We see many examples of franchisees simply presenting figures given to them by their franchisor, without really understanding what they mean.
As franchisors it is essential that you encourage your prospective franchisees to take ownership of their figures, particularly the cash flow forecast. If they are unable to explain these to the lender in a convincing fashion, it's likely they will be turned down for the finance they need to get their business off the ground.
It's not just a cash flow forecast
In contrast to the above, we are sometimes presented with a cash flow forecast and little else. The bank won't just focus solely on figures.
The business plan needs to demonstrate that the franchisee has fully researched the local competition and that they understand their market, etc. Whilst the cash flow forecast tells a lender what will happen, the business plan explains how it will be achieved.
It's not just about the franchisee. It is helpful that when the franchisee presents their business plan they explain exactly what help they will be receiving from their franchisor and the track record of the franchised business.
Fundamental rules for writing a plan:
Do: Clarify the purpose of your plan before you write it focus on the key information the reader will want and make it easy to find - sometimes it can be hard to clarify how much the applicant wants to borrow! Highlight future plans as well as describing the current situation be realistic - make sure that the business can afford the proposed repayments.
If the lending is for the purchase of a poorly performing resale, give some commentary about why turnover and profits are set to rise, and details of the assumptions made.
Don't: Waffle or include unnecessary detail, base your plan on over-optimistic assumptions or ignore competitive threats and weaknesses
The more solid the information that the franchisee can gather, the better the business plan will be. When requesting finance the bank will look to assess the proposal using all of the areas covered above. A well-researched and written plan will show the bank that the franchisee is committed and understands their business, meaning that a request for finance is likely to be looked at more favourably than those who are unprepared.
Additional help and assistance on writing a business plan can be found at HSBC Knowledge Centre, an online resource to help business owners whatever stage their business is at.
HSBC remains open for business and in 2009 and has lent more to the franchise sector than at this time last year. It is the only UK bank to be named in Global Finance magazine's 2009 list of Top 50 Safest Banks and the top for customer satisfaction compared to the other major UK banks.
Add this together with its specialist franchise knowledge and you can be confident that HSBC is the right banking partner for you and your franchisees.
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