Remember that when choosing a franchise, it has to be a good fit. If the franchise wants you to be hands-on, then you better be hands on. If the franchise markets mostly to children, then you should be comfortable in a room full of kiddoes!
So, if you’ve set a specific fiscal goal – which you should – then the franchise needs to prove that they can actually help you meet it!
#19 of the Franchise Disclosure Document – ‘Financial Performance Representations’ – permits a franchisor to provide information about the actual or potential financial performance of its franchised and/or corporate-owned outlets, IF there is a reasonable basis for the information, and if the information is included in the franchise disclosure document. Important to note, though, is that financial information that is different from that included in Item 19 can be given only if: a) a franchisor provides the actual records of an existing outlet you are considering buying; or b) a franchisor supplements the Item 19 information by providing, for example, information about potential performance at a particular location or under certain circumstances.
What you’ll see:
• Earnings Reports from current franchisees
• Current franchisees typical costs, including
- Royalty Fees
• Factors likely to affect your future financial performance
Why is this important?
This data gives you the opportunity to calculate your own earning potential, analyze the risks in your area, determine which factors may have an impact on your profits, and adjust your budget, if necessary.
And wouldn’t you feel more confident having that information?
Item #19 is also a time-saver, to be honest. Without this material, it might take prospective franchisees months to determine if a franchise is a good financial fit for you. Many franchises are capitalizing on this detail by providing high-quality earnings reports from the beginning to help you make a quicker decision.
Of course, there are some things to look out for….
First of all, I’m going to be honest – not all franchisors provide this information. They’re not required to.
In fact, only 30 – 40% of all franchises provide this information in their FDD, according to an article by Franchising.com.
If a franchise does not provide current financial data on their franchisees, then they are simply required to state that they ‘Wish to not make any financial claims.’
So, that said, when you first obtain your FDD, check #19 to see if it’s blank. If it is, your next task should be to ask, ‘Why?’ Always ask ‘why’ when the franchise refuses to provide earnings statements to make sure they aren’t hiding something.
Second, just because they’ve provided you with data, doesn’t mean it’s reliable.
For example, look through the expenses on the earning statements and see if you can find the franchises advertising, royalty and other regular fees included as line items. Sometimes, a franchise will create earnings statements based off either their corporate stores or their older locations. This provides inaccurate figures because corporate stores don’t generally pay any royalty or advertising fees and older locations may have better rent rates, original small business loans that have already been paid off, or similar circumstances that may affect their earnings.
In other words, scrutinize the earnings statements carefully and make sure they provide you with relevant data that’s applicable to your particular situation.
The bottom line is that Item #19 can either be a truthful representation of your earning power OR a sad effort to make a franchise look like more of an ‘opportunity’ than it really is. #19 should be cross-referenced with Items #6 and #7 to make sure that they’re providing reports with ALL possible fees and expenses to give you an honest depiction of what their average investors are earning.
Item #20 of the FDD discusses those who have gone before you. One of the most critical components of your research, you won’t want to miss this….