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If Franchisors Would Answer Only One Question

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There is one question that all franchise prospects should ask and franchisors should be able to answer. Learn what this question is and why itís so important.

Recently, I was a having a conversation with a friend who has been in the franchise industry for over 25 years. He has worked for franchisors as a franchise sales person and consultant. Most recently he has taken an active role on behalf of promoting additional franchisee rights. One of the topics we discussed related to Item 19, which is where franchisors can disclose franchise revenue and earnings data in the Franchise Disclosure Document. (Read a previous article I wrote on Item 19). Itís estimated that only about 30% of franchisors make some form of disclosure under this section of the FDD. He commented on the fact that if franchisors could provide franchisee revenue data it would be very helpful to prospective franchisees. Moreover, obtaining information pertaining to franchisee expense and product costs is easier to obtain. Sources include the franchisor and franchisees. This started me thinking about just how important franchisee revenue information can be. In fact, given how few franchisors disclose under Item 19, it led me to consider a hypothetical situation.

If a franchise candidate could ask the franchisor only one question? (The candidate could still rely upon the FDD and other sources of information.) I came to the conclusion that the question should be ďHow much in annual revenue did the franchisees achieve for the past 12 months?Ē  There would have to be a basis for the information such as a minimum of one year in operation and a credible source of information such as a tax return or report certified by the franchisee to be true and correct. Statistical measures would need to including the median, mean (average) and mode. Armed with this information a franchise candidate could do a break even and cash flow projection that is based upon realistic revenue figures. Obviously this wouldnít mean that the franchise candidate would achieve these results, but that the possibility does exist.

Franchisors need to consider how important revenue information is to prospective franchisees. Iíve heard all the excuses and reasons why a franchisor doesnít disclose under Item 19; the information isnít reliable, gathering the information is difficult, franchisor legal exposure, etc.

If a franchisor focused upon one item, namely franchisee revenue and used their franchise attorney to insert the proper safeguards for gathering and disclosing the information I donít think this would be a major issue. After all, shouldnít all franchisors want to know how much revenue their franchisees are generating?

Making a disclosure under Item 19 pertaining to franchisee revenue is not a difficult task.

Consider the benefits:

  • Set the franchise apart from those that donít disclose revenue information
  • Provides important financial information for the franchise candidate to use in their analysis.
  • Identify the revenue that existing franchisees are achieving
  • Can indicate franchisee product, pricing and service areas that might need adjusting
  • Providing franchise candidates this information under Item 19 can eliminate claims of misrepresentation during the franchise sales process.

Franchisors should disclose franchisee revenue data under Item 19 of their FDD. This information would provide important information to franchise prospects and provide credibility to the franchisor.

© 2011 FranchiseKnowHow, LLC

Ed Teixeira is the President of FranchiseKnowHow, LLC. He can be reached at franchiseknowhow@gmail.com

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