Money plan

Carl Reader on planning your finances before investing in a franchise

All new business owners have to ensure they have their finances in order before setting out on a new venture. This is perhaps more evident in franchising, where there is an upfront fee to represent the training, brand and systems that are acquired as part of the initial investment. 

Before investing in a franchise, it is important to understand your own financial position. I always recommend that prospective franchisees establish their net worth position, by listing all assets and liabilities. This summary, known as a personal balance sheet, might look like figure one.

Once a personal balance sheet has been prepared, it is then possible to extract the items that can identify amounts (such as cash and shares in publicly listed companies), which can be invested in to the business relatively quickly. This exercise will help you understand your own financial position, and in tun the affordability of any new franchise opportunity. It is then necessary to appraise the investment in the franchise.

The headline figure used to compare franchises is often the initial franchise fee, however it is important to consider all relevant costs of starting the business. Most ethical franchisors will provide you with a realistic ‘total investment’ amount, which should include not only the original franchise fee, but also any additional costs, such as equipment, motor vehicles, and an initial promotional budget. This total investment should also include any working capital required to help support the business in the early days.

When applying for funding from a bank, you will be required to produce a business plan, demonstrating what the bank is lending the money for. An essential part of any business plan used for funding is a breakdown of the initial costs of running the franchise. The banks are looking to ensure they are lending the correct amount, so the business has enough to be a success  and ultimately service the debt, whilst also not lending more than is necessary. Your franchisor should provide you with a full breakdown of the total investment to help support your funding application. This breakdown can also be very valuable for ensuring you claim as much tax relief as possible in year one.

It is also very beneficial to include your personal balance sheet (as described earlier) within the business plan. This will allow you  to demonstrate to the bank that not only  have you taken the effort to consider your personal finances befoe investing, but also that you have sufficient financial standing to support the business. This will also be used by the bank to determine your ability to  meet any security requirements that they might have.

Carl Reader 
Carl Reader is a partner at  Dennis & Turnbull Chartered Accountants
& Strategic Advisors, based in Swindon.
For more information call:  01793 741 600

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