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Why Franchisors Should Provide a Detailed Item 19 Disclosure

by Ed Teixeira

It's important that franchisors show prospective franchisees the financial information they require.

For a number of years, franchisors from poorly performing franchise systems avoided disclosing franchisee financial information by invoking the requirement that to do so required an Item 19 disclosure, commonly referred to as a Financial Performance Representation ("FPR") which they didn't meet.

Those were the years when only 25% of franchisors did an FPR, compared with over 65% today. This increase in financial disclosures is being attributed to competitive factors and more franchise savvy franchise candidates. An analysis by FranchiseGrade.com of its Top 500 Franchise Systems revealed that 95% had an FPR or Item 19 disclosure. Although one shouldn't attribute this to a purely cause and effect relationship it's hard to attribute this statistic to mere coincidence.

As these same factors encourage more franchisors to do an FPR, the next step in this disclosure evolution will be more complete financial disclosure. Some franchisors provide average franchisee revenue figures and the top quartile of franchisee revenues. However, there are franchisors that provide an FPR that includes a complete franchisee P&L and other detailed information. Just like a franchisor can currently tout an FPR a sub- group of these franchisors are able to place distance between themselves and competitors by extolling the full financial disclosure they provide to prospective franchisees.

The benefits of a detailed FPR include:

  •  Presents a documented example of a successful franchise system
  • The FPR can be shared with existing franchisees
  • Franchise candidates are able to construct more accurate cash flow and proforma statements
  • Franchise candidates have more confidence in a franchisor willing to share detailed financial information
  •  Sets the franchise apart from competitors that don't provide an FPR or little detail in the one they provide
  • Can provide the basis for franchisee financial performance analysis, that can be shared with the network

Francisors should provide an FPR that contains detailed information for prospective and existing franchisees.

2015 FranchiseKnowHow, LLC

Ed Teixeira is the President of FranchiseKnowHow.com and Chief Operating Officer, FranchiseGrade.com. He is a former franchise executive and franchisee. He can be contacted at 631-246-5782 or at  franchiseknowhow@gmail.com

 

 

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