Budgeting for an emerging or growing franchise group
As Greg Nathan from Franchise Relationships Institute states in his book Profitable Partnerships, ‘Happy franchisees are profitable franchisees and profitable franchisees are happy franchisees’.
But getting franchisees to a point where they understand what it takes for them to be profitable can be tricky. I believe success starts right at the beginning, when a prospective franchisor defines exactly what their franchise group will look like and who will do what, and then managing budgets to make sure it all works.
There is a process which starts at concept stage and keeps going all through the life of the franchise, changing with the times. Managing this process through thick and thin is the clear responsibility of the franchisor. This is one of the key features that attracts astute people to the franchise sector, and why it is such a standout success.
Let’s look at how this process works.
Franchisor cashflow budgets
First, set the group up around the people involved. Whether you are reviewing an established franchise group, converting an existing business to the franchise model or developing a group from a business concept, the first step is always the same: work out who does what.
On the surface this sounds simple. But we have found that quick assumptions just don’t work.
People have unique characteristics and skill sets, which means we are great at some things and not so great at others. The key is to find people who can do the core technical tasks and who will keep the customer happy.
So, ask a series of questions to work out who really does what and what support is needed to keep franchisees successful at looking after clients and bringing in the money. Then set up initial cashflow budgets and fee structures to make sure the money works.
Once you’ve got the people plan, it’s time to measure it against the money. And the more accurate the base, the better your cashflow budgets are going to be.
So, wherever possible, the first thing we ask for are cashflow budgets based on an existing business or franchise group. Then we ask for budgets to be prepared for franchisee initial set up costs, and all marketing and other contribution plans.
This material is then used to set up three-to-five-year cashflow budgets for a proposed franchisee business and the new franchisor business. Yes, we believe you will be converting your business from one business into a minimum of two new business entities and both need to be planned together carefully so they work in unison to get the job done.
Once you are happy with the budgets, contact a franchise consultant and franchise-savvy accountant to discuss your findings. What is their opinion on the fee structures you need to put in place for your initial fees, marketing and other contribution fees, ongoing support requirements and royalties, and the number of franchisees required to make it profitable?
Are your franchisees likely to make enough to give them a healthy profit so they stay happy and profitable after they have paid all their expenses and their payments to the franchisor?
This is a critical issue for all in business, highlighted by the pain suffered during the challenges of 2020 when cash flow dived into negative for so many.
Each new franchisor must be aware of the need for additional capital to fund the franchising process and the operation of the company while the group is growing—until the critical mass has been reached to allow reasonable withdrawal of funds. This could take months or even years, depending on your business model and your success in recruiting franchisees and a throng of happy, loyal customers.
And don’t forget the investment needed to recruit the ideal franchisor management and support team around you. This is a red-light area for those who’ve not taken the time or received the appropriate advice to produce accurate financials and forecasts. Something a typical entrepreneur may dismiss with a wave of the hand, saying, ‘Don’t waste my time with this stuff! I want to get on with the excitement of growing the business’.
Our impressive ‘franchise-savvy’ experts from The Grow CFO Co, Deborah and Jeremy Harris, describe this beautifully when telling our clients “Think about it this way – revenue is vanity, cash flow is reality.”
The growth trap
Have you ever been on holiday and had to dig into your savings? Join the crowd! It’s the unexpected costs and little indulgences that cause the problem.
In a new franchise group, such issues involve a delay in sourcing your first franchisees, incurring unexpected advertising expenses, bringing in a broker, the resulting lost revenue—the list can grow alarmingly.
Which brings me to the painful reference of your treasure chest to handle any contingencies. It may be cash in the bank, better still savings, or a credit line with the bank. As Jeremy brutally reminds us, “Wealth is the number of days survival forward.”
Post-Covid, a minimum six-month buffer of working capital is my recommendation: calculate it now—you’ll be alarmed.
Review and update
Once you are up and running, review and update your budgets at least every three months and adjust necessary elements of the franchise group and your budgets as required. Think of these budgets as your strategic spending plan—they are an integral part of managing both the franchisor business and the way franchisee businesses are supported into the future.
Franchisee cashflow budgets
We all know it is good business practice for every business be managed within the framework of clear goals laid out in a succinct three-to-five-year business plans with realistic cashflow budgets.
Franchised businesses are no different. In fact, business planning for franchisees is probably even more important because such plans provide a sound basis for the franchisor to review performance within the group and help franchisees grow their business.
Ask each franchisee from the day they begin to prepare cashflow budgets and business plans for their business/es for the next three-to-five-years. Make sure they contain clear goals and KPIs for important aspects. Provide templates so the plans cover the issues required but not specific figures and never promise levels of achievement.
Drawing on historic results or clearly qualifying notional figures is the way to go. And for comfort, check with your financial and legal advisers.
Then plan meetings around the review of these plans every six to twelve months.
This way franchisee performance can be measured against a personal and fair bar which reflects where each franchisee is in their journey, the characteristics of their personality and the potential of their territory. It also means that training, coaching and support can be supplied more meaningfully to help each grow by focusing on agreed areas that need attention.
Franchising is about people and the relationships between the two sides and, to work, it has to be based on clear shared goals, with well managed money being one of the essential foundations. Good cashflow budgeting from beginning to end will really help the relationship flourish.
Brian Keen has been involved in the franchise industry for more than 30 years and, today, is the Founder of Franchise Simply. His on-the-ground business experience as a multi-unit franchisee, franchisor and consultant helping many of the big names create their own franchise systems and growth over the years has been fed into Franchise Simply, helping today’s SMEs grow their business by franchising.