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Franchisors Need to Provide an Item 19 with Punch!

by Ed Teixeira

Although a majority of franchisors provide an Item 19 Disclosure the key is to provide meaningful data.

There was a time not long ago, when less than 30% of franchisors did an Item 19 disclosure, commonly known as a Financial Performance Representation (ďFPRĒ). Over the past several years that number has increased to where over 60% of franchisors do an FPR. For some franchisors doing a simple FPR may seem sufficient to satisfy the needs of prospective franchisees, however, this is not the case. A recent analysis of 2,100 franchise systems by Franchise Market Research firm FranchiseGrade.com revealed that over 70% of Healthy Franchise Systems did an Item 19, while 52% of Unhealthy Systems did an Item 19 disclosure.


Taking this a step further, there is a disparity among franchise systems that do an FPR. Some franchisors provide information that is so limited itís of little value to prospective franchisees. Examples include; providing system wide average franchisee revenues only or a franchise sector number such as average number of members for franchisees in a fitness franchise. Neither one of these franchisors provide meaningful data that can be used by a candidate to construct a cash flow projection or pro forma income statement.

Contrast these examples with franchisors that provide an average franchisee income statement or average revenue, gross margin and expense information by quartiles or in total. If you were considering various franchise opportunities, which Item 19 would you prefer to see? The answer should be obvious, because the more details provided in an Item 19 the more readily a franchisee candidate can construct financial models.

As the inclusion of an FPR in an FDD becomes more commonplace, franchisors need to provide meaningful data for franchise candidates. There are basically three reasons why a franchisor doesnít do an FPR; itís a startup franchise, franchisee financial performance is poor or the franchisor doesnít wish to devote the time and effort to gather the required information from their franchisees. As franchise candidates become more aware of how important Item 19 is to the evaluation and analysis of a franchise system, franchisors that fail to include detailed information will be at a significant disadvantage, as potential franchisees recognize the importance of this information to their future success.
 

 

© 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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