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Franchising Your Business: The Financial Arrangements
You're in business to make money and there's no point choosing a growth strategy which doesn't maximise your profit potential. Some franchisors would be more profitable if they owned their own outlets themselves. On the other hand they would never have grown to a fifty or two hundred 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 don't:
- 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 can make any real profit element on the initial fees. Profit comes later from the on-going charges to franchisees based on their trading success.
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 on turnover are preferable but 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. The British Franchise Association Banking Affilates can steer you in the right direction.
Franchising Your Business: The Offer Documents
If you are selling the opportunity to use your brand and your business system, with the benefit of the support systems you offer, within the framework of a franchise agreement and initial and continuing fees, you will need a "prospectus".
Potential franchisees will want to know what business they can expect to do and
how profitable it can be.
Since your business is already up and running, and since you will have already run a pilot scheme discrete from your own operation, you will have some facts on which to base your projections.
Good franchisors have to draw a fine balance between generating expectations which can be met, and giving franchisees targets which are so low that they do not need to fully exploit their business opportunities.
You shouldn't oversell or undersell, but that's also a matter of matching the presentation of your offer to the norms of the franchises' recruitment market, so experienced advice can be helpful. The British Franchise Association's franchisor seminars are a good source.
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