To their astonishment, prospective franchisees frequently struggle to answer the most fundamental investing concerns – How much money does the average franchisee make? How much money can I reasonably anticipate earning? This is because over 70% of franchisors opt-out of including sales, costs, or another unit financial information in their disclosure filings. They are only legally permitted to provide you with that information through those documents.
Reasons Why Franchise Sellers Withhold Full Information
- They obtain information from franchisees that is not audited and may not be accurate.
- The facts may be misleading due to changes in the units themselves, such as market size and kind, established location size, open location maturity, local competition strength, and the impact of brand familiarity in new and older markets.
- By making the information public, their competitors would acquire information about their sales, cost of sales, margins, and sales mix.
- Unit performance is so poor for some franchisors that they will lose making a sale by revealing their real results.
Assessing the Financial Performance Report of the Franchise seller is critical for evaluating a franchisor. Even if the franchisor chooses not to provide the information you seek, you can locate the majority of it on your own with a little effort.
The Usefulness of the Franchise Disclosure Document
When combined with other research, the FDD (Franchise Disclosure Document) contains additional “hidden” resources that might provide insight into profitability. Begin by carefully reviewing the franchisor’s FDD:
- If they manage company-owned sites, they may gather information about unit performance from the audited financial statements and accompanying notes.
- Examine items 5 and 6, which contain information about the franchisor’s initial and ongoing fees. Often, these are contingent upon meeting certain sales performance requirements or attaining a certain level of sales performance.
- Article 7, your original investment estimate, and the notes are typically a gold mine of information. Franchisors frequently offer observations on unit performance that an accountant familiar with franchising might utilize to develop estimates.
- The FDD will list current and former franchisees. Call and question them. They can discuss average revenue, profit margins, cost of goods, working capital, and return on investment. Former franchisees can tell you why they left and if they made a profit. However, existing and previous franchisees can offer you the essential information.
Accessing Financial Performance Report from SEC
- If your franchisor is a public corporation, their SEC filings will certainly contain financial data. Typically, this information is available on the franchisor’s website.
- Examine all press releases and articles written about the company. Reporters frequently ask franchisors for sales and financial data. You will also see how your franchisor compares to the franchised and non-franchised competition.
More franchisors are including financial and statistical data in their disclosure agreements to assist prospective franchisees in developing more accurate estimates for their local markets. Obtaining the financial performance report is a little work till all franchisors comply. Nonetheless, with the assistance of competent, professional consultants, you can typically develop a very accurate profile of the franchise you are considering.
Liked what you read? Follow us on Linkedin.
Want your franchise news to be covered? Send your Press Release.