Business plans form an integral part of any business’s development process. Without a business plan a business has little chance of success. In many small businesses the plan resides in the mind of the business owner or manager and is often vague and lacking in clear thinking. The very process of putting the plan down on paper presents an opportunity, or even a requirement, to produce clearly developed strategies for the growth of the business.

WHY HAVE A BUSINESS PLAN?

The franchisee’s initial business plan has a number of objectives:

• it may be required to present to a bank or other source of finance to help fund the franchisee’s investment;
• it confirms to the franchisor that the franchisee has realistic objectives for the franchised outlet;
• it focuses the franchisee’s mind on what has to be achieved in the new business;
• it provides a series of markers against which to monitor the progress of the business.

All too often small business owners produce an initial business plan for the first of the above objectives and once finance has been approved the document goes into a desk drawer, never to see the light of day again. The wise owner, however, sees the business plan as an integral part of the business development strategy and continually reviews, revises and rewrites the plan.

It is almost impossible to read any book, article or other document about business planning without seeing some version of the old adage ‘To fail to plan is to plan to fail’. However, Sir John Harvey-Jones had a much more thought-provoking view when he said ‘Planning is an unnatural process; it is much more fun to do something. The nicest thing about not planning is that failure comes as a complete surprise, rather than being preceded by a period of worry and depression.’

• When presenting a business plan to a bank or a possible investor it is important that the reader can see that the business has a clear strategy that should result in sufficient profitability for the funder to get its capital repaid, in addition to an adequate return on the capital. Clearly set out goals relating to both the activities of the business and the financial consequences will give confidence to any lender.
• During the franchisee recruitment process the franchisor may require the prospective franchisee to produce a draft business plan that will demonstrate the franchisee’s objectives for the business. If the franchisee’s goals fall short of the franchisor’s expectations for the territory being granted it may prompt a discussion about the level of commitment required by the franchisee to develop the business fully.
• The franchisee, while writing the business plan, will have to set out both his goals for the business and also what will need to be done to achieve those goals. This could be the final opportunity for the applicant formally to reappraise whether the business opportunity offered by the franchise is right for them.
• During the early months of the business the actual results of the business, both in terms of financial and developmental achievements, can be checked against the objectives laid out in the business plan.

The initial business plan has often been likened to the planning that goes into an expedition. The objective is set to reach a certain destination or achieve a certain result, the resources needed to get there are measured, the personnel who will be involved are identified, the methods of transport to reach the destination are chosen and time-scales are developed to ensure that all the objectives can be met within the limitations of the resources. All this planning, however, will be of little avail if the progress of the expedition is not monitored against the plan.

ANNUAL BUSINESS PLANNING

Any franchisor that does not require their franchisees to produce a business plan at least once a year is failing those franchisees. Most franchisees, when they first set up their business are quite naive in business matters. Even those who have held management positions in the corporate world may have little or no idea of how a business is run or what plans need to be made to ensure its success. Part of the franchisor’s role is not only to provide the disciplines the franchisee must follow in operating the system but also to provide good advice on general business management issues. It is not sufficient that the franchisee knows how to ‘do the job’; they need to know how to run a business that does the job. Business planning is an integral part of this process.

If a franchisor does not receive copies of the franchisees’ business plans it is difficult to see how they can make meaningful plans for their own business. They may hope to increase turnover by say 15 per cent during the coming year but if all his franchisees are aiming for only 8 per cent their hopes are bound to be confounded.

Within most businesses the growth of the business is almost entirely in the hands of the business managers. They set the objectives and then develop the strategies needed to meet the objectives. Yes, they rely upon their employees to implement the strategies but they do have the ability to manage and motivate their staff on a daily basis. A franchisor, however, is totally dependent upon the performance of their franchisees, over which they have little direct influence. Franchisees who fail to develop their businesses fully have a direct and detrimental effect on the profitability of the franchisor and the development of its brand. We discuss in Chapters 16 and 17 respectively the importance of monitoring franchisees’ performance and of motivating them to develop their business. The business plan is a key instrument in both of these processes.

WHO WRITES THE BUSINESS PLAN?

Ideally it is the franchisee. However, at the point that the initial business plan is written, the franchisee will have no direct experience of the business to inform what goes into the plan. Moreover, they may have little or no knowledge of what a business plan is or how to write one. There is a clear role for the franchisor to play in providing some assistance with the writing of the initial business plan.

The franchisee will need information for financial forecasting on many or all of the following:

• potential sales levels;
• sales profiles in a start-up situation;
• sales profiles with regard to any seasonality of the business;
• purchase and profit margins;
• sales per head of staff;
• anticipated expenditure levels;
• customary credit arrangements for both purchases and sales;
• anticipated start-up costs including equipment and fixtures and fittings;
• stock levels required.

However, the franchisor must be wary of providing any financial information that could be considered in any way a guarantee of performance. Many legal advisers will warn their franchisor clients of the potential hazards of becoming involved in assisting franchisees to develop their financial forecasts lest the unsuccessful franchisee should later come back to the franchisor and make the claim that ‘You said I would achieve x sales and y profitability and I haven’t.’

In reality the franchisor will need to provide guidance based on the achievements either of its own outlets or those of the pilot and other franchisees or both. It is then up to the franchisee to make their own forecasts based on this information. The franchisor will, however, wish to satisfy itself that the financial forecasts are realistic and in line with the actual performance of other units. Franchisors are increasingly using the services of independent third parties to assist their franchisees in producing their business plans. These advisers will need to have a clear understanding of the business, its operations and the key information needed to guide the franchisee.

When writing the narrative of the business plan the franchisee will need access to various information from the franchisor:

• the franchisor company’s trading history;
• the number of franchisees operating;
• any national or local marketing instigated by the franchisor;
• details of any recommendations from the franchisor regarding local marketing to be instigated by the franchisee;
• details of the support structure of the franchise.

This information may be provided as ‘bald facts’ for the franchisee to incorporate within their business plan, or they may be provided as part of a template produced by the franchisor with the franchisee filling in the ‘local’ sections. Either way all these topics will need comment in the business plan.

WHAT SHOULD BE IN THE INITIAL BUSINESS PLAN?

The franchisee’s business plan should contain all the information normally found in a business plan but should also contain in many of the sections additional information regarding the franchisor’s business.

Typically it will contain, although not necessarily in this order:

• vision/mission statement;
• details of key employees;
• company history;
• list of company products or services;
• details of target market;
• the growth opportunity;
• competitive climate;
• SWOT analysis;
• details of planned marketing activities;
• company services or products, including any unique aspects;
• revenue/profitability history;
• financial forecasts;
• capital requirement and provision.
• A vision/mission statement developed by the franchisee will provide a positive, focused starting point for any reader of the business plan. This vision/mission will be based on the franchisor’s vision or mission statement but will be adapted it to the franchisee’s local business situation.
• Details of the franchisee’s work background and experience, linked with those of any other key employees, for example partners who will be involved in the business, should show in what areas there is experience that will benefit the new business. Where there is no relevant experience comment should be made on the training that the franchisee has undergone, or will undergo, to equip them to run the business. It is often helpful also to include information about the franchisor’s key personnel, as it will be they who will be providing guidance and support for the franchisee.
• In an initial business plan there will be no company history available for the franchisee unless they have had a previous trading company and the new franchise is an extension of that. It would be useful, however, to include a small section on the trading history of the franchisor as this will demonstrate that there is a proven business system behind the franchise.
• Details of the company’s products or services should be included in sufficient detail to provide the reader with an understanding of the way in which revenue will be generated. Where it is considered useful some of the franchisor’s own product or service literature could be included as an appendix.
• The target market should be identified both in terms of the local market for the franchisee and also the national market for the franchisor. Where, due to local circumstances, these two markets differ, comment should be made on the reason for the difference.
• The growth opportunity should be quantified as far as possible, again for both the franchisee and the franchisor.
• Information on the competitive climate, both locally for the franchisee and also nationally for the franchisor, should be discussed. Details of market research by the franchisee should be included to demonstrate his or her knowledge of its local competitors and their relative strengths and weaknesses.
• A realistic SWOT analysis outlining the Strengths, Weaknesses, Opportunities and Threats relating to the franchisee’s business should be included. This will demonstrate that the franchisee has thought through the proposed venture and identified the areas where it may need most support or guidance from the franchisor.
• Any marketing activities proposed by either the franchisor or the franchisee to raise awareness of both the brand and also the individual franchisee’s operation should be detailed. In many franchises local marketing is critical to the success of the operation. While a retailer with a dominant brand such as McDonald’s or Clarks Shoes may immediately attract customers as soon as the outlet is open, many franchises rely totally upon continuing marketing activity to find customers.
• A brief description of the company’s products or services and details of anything that makes them unique in the sector should be included.
• Where the franchisee has previously traded, details of their revenue/profitability history should be included along with basic information about the franchisor company.
• Sales/profitability and cashflow forecasts should be included for at least three years, including a detailed month-by-month analysis at least for the cashflow. This will determine the level of funding required both for the start-up investment and also for working capital.
• Finally, information should be included on the capital requirement and how it will be provided. This should include a clear indication to investor/funder what the funds will be used for and how it is proposed that they will be repaid. It is likely that the franchisee will have already received an ‘in principle’ indication from their bank regarding the level of borrowings that will be available and the terms on which they will be lent.

WHAT SHOULD BE IN SUBSEQUENT BUSINESS PLANS?

After the initial business plan, which often has funding as one of its objectives, subsequent plans can be less detailed. The franchisee should be encouraged to produce sales/profitability and cashflow forecasts for the coming 12 months and a narrative section that addresses the activities that will need to be completed in order to generate the forecast level of sales. This might include the identification of new target customers or new marketing activities that will attract new customers.

Subsequent plans should also address other development issues, for example staff training and identifying the franchisee’s own training needs. It may be that if new marketing and sales strategies are planned new skills will need to be learned by the relevant personnel.

They should also include a review of the previous 12 months’ trading in comparison to the forecasts within the earlier business plan. This self-appraisal should produce a similar result to the type of appraisal that a member of staff might receive from his or her manager and may go on to form the basis of an annual review meeting with the franchisor.

MONITORING PERFORMANCE AGAINST THE BUSINESS PLAN

The role of the business plan in monitoring performance is discussed in Chapter 16. However, it is important to stress that a business plan is of little use if it is not used as a marker against which to monitor current performance.

A system should be established, therefore, for the franchisee to produce regular, simple management accounts that report on the key indicators within the business. Perhaps the most important of these is cashflow. It is well known that poor cashflow results in the failure of many profitable businesses as generating profit is not necessarily a guarantee of generating cash.

If it becomes clear that either temporary or permanent additional funding might be required during the coming months it is important to arrange this funding as soon as the requirement is identified. A banker will be more prepared to consider additional funding if given good notice of the requirement than if they are asked at the point that the funding is required. The banker will certainly wish to see the forecasts that identify the need for the funding and will need to know why it is required. It is clear that the application for additional funds is more likely to be successful if it is to fund growth within the business rather than fund losses!

FINALLY...

Earlier we likened the business plan to the preparations for an expedition. It could equally be likened to a map that must be followed if that expedition is to be successful. It lays out the route to success and shows how the business can steer clear of risks and obstacles while taking the optimum route to its final goal of profitability.