As franchise specialists, we speak to a lot of small business owners with big dreams about franchising their operation. And for good reason. Becoming a franchisor has plenty of benefits that we’ll get into below. But, before you buy a franchise or franchise your business, it’s essential to build a financial model that displays the outcomes for both the franchisee and franchisor, based on your assumptions and strategy.
Building a Franchise Financial Model to See Into the Future
Building a financial model for any business can be challenging. But building a financial model for a franchise system involves an additional layer of complexity as you need to consider the outcomes for both the franchisee and the franchisor. Being able to see into the future is even more important for franchise businesses because all of the charges between the franchisee and franchisor are documented in the franchise agreement, which is a legal document that is locked in place before the business commences.
Once a franchise agreement is signed it’s very difficult to change, so it’s critical to understand the expected outcomes across a range of revenue and performance levels for both the franchisee and franchisor.
How to Build a Financial Model for a Franchise System
When building a financial model it’s important to go deep into the business to understand all the moving parts. In order to understand the expected outcomes of an entire franchise system, we collaborate with business owners to build a five-year financial model that displays the outcomes for both the franchisee and franchisor, based on their assumptions and strategy.
We learn about the business and identify and document all the key assumptions required to build the model, building a forecast that displays the results of a ‘typical’ franchisee site by considering the following:
Sales and Revenue
- The key drivers of sales
- Impact of various pricing and sales volumes
- Marketing spends and customer cost of acquisition
Key Expense Ratios
- Costs of Goods Sold (COGS) as a percentage of revenue
- Employment costs as a percentage of revenue
- Rent as a percentage of revenue
- Other overheads
Franchise Charges
- Royalty
- Marketing levy
- Training
New Franchisee Set Up Costs
- Capex and Site ready
- Franchise Equipment and Fit-out
- Franchise Fee
Building a Financial Model for Franchisors
We then use the results from the typical franchisee and the assumptions below to display the results for Franchisor.
Sales and Revenue
- The timeline for the roll-out of sites
- Impact of franchise charges and the profitability of the franchisor
- Identify additional revenue streams
Key Expense Ratios
- Employment costs required to support the franchisor
- Other operating costs
Outcomes of a Financial Modelling Process
After we build the model we test it with dummy data across various scenarios. Then we meet with you to present the model, discuss any recommended changes to your strategy and correct any false assumptions. Then it’s time to lock in the final figures and get you started on your franchise journey.
Know the Benefits of Franchising Your Business
Franchising your business requires the help of a franchise advisor or consultant, but before you start talking to the experts, understand the pros and cons of franchising a business. Let’s start with the benefits of franchising your business:
Access to Capital
Franchising can be a great way to access additional capital to grow the brand as franchisees can access their capital to buy and launch sites.
Motivated Partners
New franchisees invest their own money into the system, which can make them more motivated and dedicated than employees.
Rapid Growth
The introduction of capital, outsourcing the management of new outlets and opening multiple franchises at the same time can turbocharge growth.
Local Knowledge
By tapping into the local knowledge of your franchisees, you gain a competitive advantage. If you’re expanding interstate for example, a local franchisee will know the local market, the people, the places and often have networks already in place.
Increased Brand Awareness
Franchisees pay a marketing levy that is used to grow brand awareness for the whole franchise system. As the system grows, so will the marketing fund.
Increased Revenue and Profits
The franchisor’s revenue is typically based on the revenue, not the profit, of franchisees. So even if you have some loss-making franchisees, you can still generate revenue and profits.
Minimised Growth Risk
Franchising can generate high financial returns for relatively little risk. Unlike adding company-owned outlets, when you franchise, you put relatively little money into adding each location. If you have a good business model, you can earn high royalties from sales at those outlets. The percentage returns you earn can be many times what you would have earned if you opened and ran the outlets yourself.
Know the Downsides of Franchising Your Business
It’s not all swings and roundabouts when it comes to franchising a business. Let’s spell out some risks and drawbacks.
Up-front Costs Add Up
Franchising your business will require a certain level of investment. Costs will be incurred in setting up the model, the operations manual, training manual, franchise agreement, advertising, sales and marketing and recruitment.
Limited Control Over Franchisees
Your franchise might be a tried and trusted model, but franchisees operate as independent businesses. You can't tell franchisees what to do in the same way that you can with employees.
A Weaker Community
It can be harder to get franchisees to work together for the benefit of the network, compared to a group of managers pulling in one direction to benefit the company as a whole.
Innovation Can Wane
It's a lot harder to innovate with franchising than if you own your own outlets. Despite these potential drawbacks of franchising, most of the above issues can be covered in a solid franchise agreement.
BlueRock Knows Franchising
Our team offers multidisciplinary franchise experience and expertise and we’ve worked with a lot of well-known brands within the franchise industry. We act on behalf of both franchisors, franchisees, and owner-operators so if you’re ready to explore franchising your business, get in touch with us today.
