One of the most frustrating experiences all potential franchisees go through is tracking down accurate franchise earnings information. It seems reasonable to think that a franchisor would be more than willing to share financial information with a person seriously interested in joining the business family, but think again. Most often, a potential franchise buyer is left to do an extensive amount of detective work in locating franchise earnings statistics and projections.
The reasons why are quite simple. Franchisors are given a choice by the U.S. government as to whether or not they want their earnings information made available to potential franchisees. If a franchisor chooses to make this information public, it can be found in Item 19 of their Franchise Disclosure Document (FDD).
However, only approximately 25 percent of franchisors actually make this earnings information public. Why is this? Often, the information that would appear in the FDD is rather unattractive (i.e., it would reveal financial losses). Also, performance projections are often included in earnings information, and a franchisee could possibly take legal action against the franchisor should their franchise not live up to the lofty expectations set forth in the projections.
However, the FDD’s Item 20 should contain the names, addresses, and phone numbers of all existing franchisees. Record the contact info of all franchisees in close proximity to you (or even ones that are far away — you can easily conduct this research over the phone) and arrange appointments with these fellow franchisees to discuss all money matters related to the franchisor and their own franchise operation. It will be to your benefit to talk with as many current franchisees as possible to get a realistic financial picture of the business.
Don’t jump right into the big questions (“So how much money do you make a month?”) when you begin talking with a franchisee about their business. Start off small; ask the franchisee whether or not he or she has a good working relationship with the franchisor, and inquire about the quality of training that the franchisee received. You should also try to get a good handle from them on the franchisor’s purchasing power, the business’s overall cash flow, whether or not the franchisor takes good advantage of group purchasing rates, and most important, the sales versus expenses ratio. In addition to these questions, try also to ask more personal ones, such as whether the franchisee is happy in the business, what kind of hours they put in, and whether or not the franchisor is open to new ideas from its franchisees pertaining to business growth.
Take the information you’ve gathered about the financial performances of the franchises you’ve investigated, and hire an accountant to assist you with devising estimated projections for the franchise you plan to open. Look at possible profits and losses, and go from there on deciding on investing in the franchise.
If your fact-finding mission leaves you in an indecisive state about investing in the franchise — if you can’t even make projections of your own about your financial fate in the business — then don’t hesitate to walk away. The last thing you want to do is blindly invest in any new business.