Financing the Franchise

You are in business to make money and there's no point choosing a growth strategy that doesn't maximise your profit potential. Some franchisors would be more profitable if they owned their outlets themselves. On the other hand, they would never have grown to a 50- or 200-unit chain without franchising.

As with any business planning process, the financials have two different approaches:

• What will it cost me, so how much must I charge to make a sensible return?

• What price will the market bear, so what can I afford to spend to make the business profitable?

In franchising you have to address these questions both from your point of view, as the franchisor, and from the point of view of your franchisees. In constructing a viable financial plan for franchising a business, do not:

• Underestimate your initial costs and the associated financial prospects

• Overestimate the early growth rates when you're just learning how to attract the right prospects

• Assume you should make any real profit element on the initial fees. Good franchisors only profit when their franchisees profit

In Europe the approach is to keep initial fees to franchisees as low as possible to maximise their chances of a successful business entry, and then to make sure that franchisees can see a value for money return on the continuing fees they pay.

Continuing fees calculated as a percentage of turnover are preferable; however, some product distribution franchises inevitably rely on a mark up on goods supplied.

The financial aspects of franchised businesses are just as much a specialist area as the legal.