By Michael Seid, Managing Director, MSA Worldwide
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? How much money can I expect to earn? The reason for this is that close to 70% of all franchisors choose not to include any sales, costs, or other unit financial information in their disclosure documents and, the only way they are legally allowed to give you that information is in those documents.
There are a number of good and valid reasons for franchisors not to provide this basic information:
- The information they get from the franchisees is unaudited, and therefore may not be accurate.
- 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.
- Providing the information in public documents would allow their competition to obtain information on their sales, cost of sales, margins, and sales mix.
- For some franchisors, unit performance is so bad that if they included the results in the offering material, they would have only a slim chance of ever selling a franchise.
Developing a financial projection for your future business is an essential part of your evaluation of 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 FDD (Franchise Disclosure Document) 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 they operate company-owned locations, information on unit performance might be gleaned from the audited financial statements and the notes contained in the document.
- Review items 5 and 6, which include information on initial and continuing fees charged by the franchisor. Often these are based upon some sales performance requirements or level.
- Item 7, the estimate of your initial investment, and the attached notes are 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 with you average revenue, profit margins, cost of goods, working capital requirements, return on investment, etc. Former franchisees can give you insight as to why they left the system and whether 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.
There are also places to look for information outside of the franchise system:
- If your franchisor is a public company, financial information is likely in their SEC filings. In most cases, that information is published somewhere on the franchisor’s website.
- Review all of the company’s press releases and stories that have been written about the company. Franchisors will often provide sales and other financial information and trends to reporters. You will also be able to see how your franchisor is staking up against the franchised and non-franchised competition – something that is critical for you to know.
- Purchase a copy of Robert Bond’s book How Much Can I Make? The book contains earnings claims on many franchisors, and you might find useful information on one of your franchisor’s competitors which you can use in making your financial model.
More and more franchisors are moving to provide prospective franchisees with financial and statistical information in their disclosure documents that will help prospective franchisees prepare more accurate projections for their local markets. Until all franchisors do, getting the information is a bit of work, but if you work with knowledgeable professional advisors you can usually create a fairly accurate profile of the franchise you are looking at.
Do you have further questions about franchising?
MSA’s experts can help you determine if investing in franchising is right for you.