Let’s Be Clear about Financials

Brands that offered financial transparency grew faster than brands that offered no financial transparency.

Hey, guess which data are the most important to prospective franchisees? According to a new survey of franchisees from FranData, “financial performance ranked higher than the initial investment levels, fee structure, and the franchisor’s support system.” Data of this type are often included in the Franchise Disclosure Document (FDD), which every franchisor is required to have. More specifically, the financial performance representation (FPR) is contained in the FDD’s Item 19.

Financial performance information gives prospective franchisees a good idea of the opportunity in front of them. From “Financial Performance Representation”

There’s the rub. “Not all franchisors supply the same kind of information in item 19 — the requirements the Federal Trade Commission (FTC) places on franchisors are limited. Companies and their lawyers often differ in deciding what is appropriate to share,” the study says, adding a move is afoot to bring more clarity and uniformity to FPRs.

Nonetheless, brands that perform better than competitors appear to be the most financially transparent. The study says these brands “grew their franchised systems by 15% compounded annually between 2013 and 2015.” Brands that disclosed no financial information grew at an 11% clip.

That may be due to nascent franchisees grasping gross margin potential — and therefore being equipped to accurately estimate earnings potential. The metric (see below) also is important in a business plan, which the prospective franchisee is likely to hand to a lender or investor.

. Knowing a unit’s average gross margins helps prospective franchisees estimate their earning potential. From “Financial Performance Representation”

Helpfully, the survey also includes a section on lenders, who also use FPRs to determine if borrowers are worth the risk. “It’s difficult to say whether financial transparency drives better performance or vice versa, but it’s clear that transparency into a system’s financial performance drives better franchise development strategies, attracting better franchisees, helping them establish more realistic business plans, and getting them access to financing faster and on better terms,” the study concludes.