To their great surprise, prospective franchisees often can’t get an answer to the most basic investment questions: How much money does the average franchisee make, and how much money can I expect to earn? The reason for this is that about 70 percent of all franchisors choose not to include any sales, costs, or other financial information in their disclosure documents, which is the only way they are legally allowed to provide that information.
There are many valid reasons for franchisors not to provide this basic information. The information they get from their franchisees is unaudited and therefore may not be accurate. The differences in the units themselves, including diversity in size and types of markets, the size of established locations, the differences in maturity of the open locations, variations in the strengths of local competition, impact of brand recognition in new and older markets, and a host of other reasons might make the information misleading. Also, providing the information in public documents would allow their competition to obtain information on their sales, cost of sales, margins, sales mix, and other metrics. And, of course, some franchisors may simply be trying to hide their poor performance.
Developing a financial projection for your future business is a critical part of evaluating the franchisor. Even if the franchisor chooses not to provide the information you are looking for, with a little work you can find most of it yourself. The Franchise Disclosure Document (FDD) has other “hidden” resources that, when combined with other research, can provide you with insight to profitability.
Start with a careful reading of the franchisor’s FDD.
- If the franchisor operates company-owned locations, the FDD may include audited financial statements for these locations.
- Review Items 5 and 6 of the FDD, which include information on initial and continuing fees charged by the franchisor. These are often based upon sales-performance requirements.
- Item 7, which includes the estimate of your initial investment, is often a treasure trove of information. Franchisors routinely include tidbits of information on unit performance in the notes, which an accountant experienced in franchising can use to help you make projections.
- The FDD will provide you with the names and contact information of current and former franchisees. Call them and ask questions. They can share information on how much they are making, information on cost of goods, working capital requirements, return on investment, and other figures. Former franchisees can give you insight as to why they left the system and whether or not they made a return on their investment. While current and former franchisees are not obligated to give you information and just might not have the time to spend with you, they can provide you with the most relevant information you can get.
You can also look outside of the franchise system for clues.
- If your franchisor is a public company, the information you are looking for is likely in their SEC filings. You can probably find this information on the company’s Web site.
- Review all of the company’s press releases and stories that have been written about them. Franchisors will often provide sales and other financial information and trends to reporters. You will also be able to see how your franchisor is stacking up against the franchised and nonfranchised competition — information that will be critical to your decision about whether or not to buy the franchise.
More and more franchisors are providing prospective franchisees with financial and statistical information in their disclosure documents. Until all franchisors do, getting the information can be a bit of work. But if you are determined and work with knowledgeable professional advisors, you can usually create a fairly accurate profile of the franchise you are looking at.