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How to verify franchisors projections

by Cathryn Hayes, Head of Franchising, HSBC

One of the simplest and most effective ways to verify the projections given by the franchisor is to speak to other franchisees. All franchisors should be willing to provide you with a list of their franchisees, so that you can contact them to find out what their experience has been and if the financial projections produced by the franchisor were accurate and if not, what the difference was.

You should not be afraid to ask the franchisor to clarify how they have arrived at the figures in any draft business plan or prospectus, as part of your research. In addition, you should obtain a copy of the franchisor’s filed accounts and possibly also the filed accounts of some of its franchisees. These are documents of public record, which can be readily obtained and will give an accurate picture of financial status of those businesses.

If you are not confident in looking at these figures, your accountant should be able to give you guidance.

Any projections provided by the franchisor will only be a basis for you to build your own business plan and projections – but they will at least give you a starting point. You should use them to check how you feel about the franchise and whether you want to go ahead. How long will it take you to get payback on your initial outlay, how much will you need to borrow to get the business up and running?

Money is not always the only factor when choosing a franchise, quality of life and the satisfaction of being your own boss with support from the franchisor and franchise network are also very important. However, you don’t want to lose your hard-earned savings, so time taken at the outset to understand the costs and potential returns will be time well spent!

Projection lies!

by Euan Fraser, AMO Consulting

There are lies, damned lies and projections – don’t get confused by a franchisor’s claims. It’s easy really; you just need to think objectively.

You must take responsibility for understanding the financial projections that a franchisor gives you. As soon as you sit in front of your bank manager they’re going to ask you what the sales figures are based on – it doesn’t help if you sit there and say “err, emm, I just used the figures that the franchisor gave me”.

You’ll need to have a good hard look at the source of the information that the franchisor has used. Here are few examples of what you need to think about:

Company owned units – these are run by experienced employees who know the product, service and systems. They probably won’t be as enthusiastic as you are or have the same determination to provide high levels of customer service, but they know what they’re doing. Can you really expect to start the business from scratch and grow it as fast as they can?

A pilot franchise operation – this is a good start but who was the pilot franchisee? Was it the top salesman in the company for the last 10 years? Are there any differences in the territory the pilot operated in? (eg Central London or one really big customer) Did the pilot inherit any business from the franchisor?

Top 10 franchisees performance – this isn’t always helpful. The top ten franchisees may be based in city centres so that won’t be too useful if you’re in a small town; and let’s face it you may not be as good as them when you start up.

Average of all franchisees – this is better. At least this gives you a starting point that could be based on someone like you. You may be better or worse than the average franchisee but these figures are definitely achievable.

So here’s the watchword; be sure that you know the basis for the projections. Be sure they apply sensibly to your territory and that you check them against the actual experience of existing franchisees. Do not base the investment on what you hope will happen, base it on a realistic assessment of what has and could happen. So leave the rose-tinted crystal ball on the mantelpiece.

Of course at AMO Consulting we’re happy to help; we have over 20 years of business planning experience. We provide a fixed fee review of your financial projections for £275 including VAT. For this we’ll look at the figures you’re given and provide a report that gives you an idea of the questions you should be asking and will challenge the assumptions you’re using – and that’s not a lie!

Contact Details:
Euan Fraser CA
AMO Consulting
t: 01357 523308