Unit one is finally working. The bank balance looks healthy for the first time since launch, the team runs a normal day without you, and your franchisor has mentioned that the territory next door is still free.
Most advice says this is the moment to grow. It tends to skip the part that catches people out: the months between signing for unit two and unit two paying its own way. For that stretch, one business carries two. If you remember lying awake doing sums about your first site in its opening months, you already know the feeling. The aim here is to make sure the second site doesn’t bring it back, and doesn’t put the first one at risk.
We have already covered when you are ready to expand and how to build the team behind it. This piece deals only with the money.
Profit on paper is not cash you can spend
The figure that makes unit two feel affordable is usually unit one’s annual profit. That number is the wrong starting point, for three reasons.
First, it is historic. Your accounts describe last year, and the bank wants to know about next year. Second, a large share of it is already spoken for. Corporation tax, VAT, your own drawings and any loan repayments all come out of that profit before a penny reaches a second site. Third, some of it is your safety margin. The reserve that saw unit one through a quiet January or a broken van is not spare money. It is the reason unit one survived.
So the real question is not “How much did unit one make?” It is “How much cash can unit one release without losing its own cushion?” For many franchisees, the honest answer is a good deal smaller than the profit line suggested.
The overlap months: two sets of costs, one income
The squeeze rarely starts on launch day. It starts weeks earlier, when unit two begins spending money it has no way of earning yet. A typical sequence runs like this:
- Before opening. The initial fee, any premises deposit or vehicle, fit-out or kit, and the first marketing push. If you are recruiting, the new team’s wages and training often start before the doors open.
- Opening months. Rent, wages, insurance, software subscriptions and ongoing management service fees all run at full rate. Revenue does not.
- Ramp-up. Sales climb towards the level that covers costs. This is the stretch where forecasts tend to be too hopeful, and it is covered in more depth in our guide to break-even timelines.
Throughout all three, unit one pays the difference. There is also a quieter cost. While you set up the new site, your attention leaves the old one. If unit one’s sales slip even slightly during that period, the gap you are funding gets wider at exactly the wrong moment.
Three ways to pay for unit two, and what each one costs you
Most second units are funded by one of three routes, or a blend. Each has a price that goes beyond interest.
Reinvested profit. No lender, no repayments, no one else’s conditions. The cost is that every pound you move is a pound unit one can no longer fall back on. Self-funding works best when the amount needed sits comfortably below unit one’s surplus cash, not when it drains it.
Bank or specialist lending. This protects unit one’s reserves, and a trading history makes you a far stronger applicant than you were the first time. The cost is in the small print. Lenders often look at the group as a whole, may ask for a personal guarantee, and may want security over unit one’s assets. That can tie the two sites together in ways you did not intend. Our guide to financing a franchise covers the main lenders.
Franchisor support. Some franchisors reduce the initial fee for an additional territory, phase it, or offer launch support for existing operators. Policies vary widely between brands, so ask directly and get the answer in writing. A lower fee helps, but it rarely covers the overlap months, so treat it as a saving rather than a funding plan.
The stress test: what if unit two takes twice as long?
Your forecast for unit two will probably be based on how unit one performed, or on the franchisor’s network averages. Both are reasonable. Neither tells you what happens if this territory is slower, this premises is quieter, or this team takes longer to settle.
Before you sign, build a simple month-by-month cashflow for the whole business, both sites together, under various scenarios.
Then find the month where the bank balance hits its lowest point in each scenario. If the tough scenario still leaves you with a working buffer, you have a funding plan. If it runs the account dry, you have a hope. The gap between those two is the extra working capital you need to arrange before launch, not after. An accountant who works with franchisees can build this model with you in an afternoon, and it is the most useful document you will take to a lender.
Protecting unit one from unit two
The worst outcome is not a slow second site. It is a slow second site that takes a healthy first site down with it. A few structural decisions, made before you sign, keep the two apart.
- Separate bank accounts at minimum. Mixing both sites in one account hides which one is carrying the other. Many multi-unit operators go further and hold each unit in its own limited company. Whether that suits you depends on tax, your franchise agreement and your lender, so take advice from an accountant.
- Read the security terms closely. Check whether a new loan is secured against unit one, whether a personal guarantee covers both sites, and whether a missed payment on one loan triggers default on another. A solicitor can flag these in a single review.
- Ring-fence unit one’s reserve. Decide in advance the balance unit one’s account must never drop below, and treat it as untouchable. If the plan only works by dipping into it, the plan needs more funding.
- Check the franchise agreement. Some agreements link territories, so a breach at one site can affect your rights at another. Your franchisor can confirm how theirs works, and it is worth knowing before anything goes wrong.
Signs you are not ready to fund unit two yet
A profitable first unit does not settle the question on its own. You may want to wait, even if unit one is doing well, when any of these apply:
- The plan only works if unit two hits its forecast on time.
- Funding it would leave unit one with less than its usual reserve.
- You have been drawing more from unit one than you planned, and the second site would need you to keep doing so.
- You cannot yet say, from your own figures, how much cash unit one generates in a slow month.
- The franchisor’s support offer is verbal, and the territory is being presented as “now or never”.
None of these means you should never expand. They mean the funding is not finished. Waiting six months to rebuild a reserve is far cheaper than discovering in month four that you are short.
Before you sign for unit two
- Work out the cash unit one can release, after tax, drawings and its own reserve
- List every cost unit two incurs before its first sale
- Build a combined cashflow under expected, slow and tough scenarios
- Arrange enough funding to survive the tough scenario, not just the expected one
- Ask your franchisor, in writing, what it offers operators taking an additional territory
- Have a solicitor check loan security, guarantees and cross-default terms
- Agree with your accountant how the two sites will be structured and banked
Find a brand that backs your growth
The right franchisor makes unit two easier to fund, not just easier to sign. Browse the opportunities on Franchise Planet, and when you speak to a brand, ask one question early: what does it offer franchisees who want a second territory? The answer tells you a lot about how it treats operators once the first cheque has cleared.
