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Pro Forma Testing

Financial analysis and testing of chain pro forma require at least four steps.

  1. Creation of a unit level pro forma that includes growth to maturity over time.
  2. Creation of a schedule for recruiting and developing channel operators over time (development schedule).
  3. Creation of a chain level pro forma that includes multiplying the unit level pro forma by the development schedule through a martix to calculate the chain results.
  4. Performing sensitivety analysis on important variables.

In order to test various assumptions, it is useful to have separate spreadsheets for unit level assumptions and chain level assumptions and tie these together with all of the other spreadsheets.

We generally recommend the use of 5-year pro forma, as it is difficult to predict your development schedule beyond that time horizon, but for some chain programs, it may be more useful to study 6- or 7-year pro forma, especially when the initial set-up is expected to take several years.

When you introduce several classes of operators, such as start-ups, conversions, add-ons, kiosks, etc., it may be necessary to make assumptions about the mix of types of operators as part of the unit level pro forma.

When you use more complex development structures, such as multi-unit owners or area developers, area representatives, etc., you will need to prepare multi-level development schedules and matrices to obtain the overall chain results.

WARNING! It has been our experience, in working on hundreds of chain pro forma, that both our clients and other advisors that they may have engaged tend to over-simplify this process and end up with inaccurate projections and erroneous decision-making. Some simplifications are in order, for instance, to make assumptions about what an average or typical unit will generate in sales and profits using a weighted average of several different kinds of units. It may not be as accurate to use weighted averages to project aggregate chain sales and profits, espcially if you accelerate or decelerate in the development schedule. It is even more inaccurate simply to multiply what mature operations are expected to generate.

The more prudent approach is to use the process outlined initially or just let us help you prepare these pro forma.

Our consultants have advised hundreds of companies of all sizes in most industries worldwide, including such brands as Commerce Clearing House, Cancer Treatment Centers of America, 3M, Pacific Bell, SealMaster, SkyTel, Sears, Henchy Industries, Hyatt Hotels, Ace Hardware, Beard & Warner, CBS, Stewart Warner, United Airlines, Northwest Orient, Coldwell Banker, Fidelity, Freuhauf Trailer, Buffalo Wild Wings, Budget Rent-A-Car, National Car Rental, Ryder Truck Rental, Chevron, Getty Oil, BP/Amoco, Mobil, Shell, Texaco Europe (Norway, Sweden, Denmark), St-Hubert BBQ (Canada), Pollo Campero (Guatemala), Helados Bon (Dominican Republic), Max’s (the Philippines), Nestle (Switzerland, Italy), Sonae Group/Orbitur Campgrounds (Portugal), The International Investor (Kuwait, England, Switzerland), Sushi Parties (Japan), L.O.G. (Norway).
News... A recent US Supreme Court decision reversed a long-standing precedent and declared it not necessarily illegal for chains to set minimum prices. The same had been said earlier for maximum prices. The legality of price fixing is, therefore, now fully based on the effect it may have on the markets. READ MORE

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