Smart and savvy franchise buyers almost always ask for your Franchise Disclosure Document - FDD at the outset when they contact their target franchisors.
Or they get the FDD from another source before inquiring directly to a franchisor.
There are 23 Items in the FDD.
The franchise buyer initially is looking at Item 7 Estimated Initial Investment and Item 19 Financial Performance Representation - FPR of the franchise concepts they are vetting.
Item 7 Estimated Initial Investment gives the prospective franchise buyer a high & low range for the investment.
Item 19 FPRs or what prior to 2008 was called an Earnings Claim provides franchise concept financial performance information.
The franchisor must have a reasonable basis for their Item 19 FPR.
Item 19 FPRs come in a variety of formats and level of financial detail can range from a minimal gross sales representation to full blown profit and loss statements.
Great franchise buyers use the Items 7 and 19 combination to develop a basic return on invested cash - ROIC calculation.
This preliminary ROIC calculation helps rule in and rule out franchise concepts for further consideration.
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Franchise concepts with Item 19 FPRs insufficient to estimate cash flow are ruled out.
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ROIC calculations within the range of 3 to 5 years franchise investment payback are ruled in.
There are over 3000 franchises offered for sale in the United States.
Only 40% or less of franchisors include the optional Item 19 FPR in their FDD.
And the as competition increases in franchising more franchisors are including an Item 19 FPR or improving the quality and depth of financial disclosure they provide
Smart and savvy franchise buyers see little reason to spend time on potential franchise investments with franchisors who cannot or will not provide financial performance evidence proving that their franchise is investment grade.
If you are a franchisor without an Item 19, you are at a real competitive disadvantage.
So, give me a call to chat how we can help you with your Item 19.
