In life, there are many questions. As a child, you pestered your parents with, “Are we there yet?”In school, it was, “Where’s the party?” And, as an entrepreneurial adult and prospective franchise owner, you’ll first and foremost want to know: “How much money can I make?”
Many years ago, the Federal Trade Commission mandated that franchisors prepare what has become known as a Franchise Disclosure Document—an FDD. The purpose of the FDD is to provide comprehensive and audited information about the business opportunity in order for franchise candidates to make an educated decision.
The FDD includes 23 sections or “items” that answer specific questions including the history of the franchisor, bankruptcies, litigation, total initial investment, training, service territory, and an item 19, a Financial Performance Representation (FPR)—how much money you can make.
When preparing the FPR, franchisors are given guidelines on what can and cannot be included, and the method of displaying data and calculating the dollars. It ensures that there’s consistency in the format and methodologies in delivering the numbers. And it allows prospects to compare and contrast different franchisor Financial Performance Representation’s (FPRs).
Before you settle into a lengthy and thorough reading of an FDD, and particularly the Item 19, make a long list of questions, possibly in consultation with your accountant, that are pertinent to the performance of the specific business, your situation and location.
Then when you are ready to wade into the Item 19, understand that franchisors have significant flexibility in the depth of information they can include. For example, one franchisor may only show gross sales for company-owned and franchised units. Another franchisor may include gross profits and other financial metrics relevant to an industry or category, e.g., average sale per customer and products sold.
The one thing to look for in any Item 19 is transparency. A good example can be found in the 2019 Allegra Marketing Print Mail franchise FDD. From system-wide sales to annual sales of Allegra franchised Centers to an Operating Ratio Study and much more, Allegra Network LLC provides a wealth of information for candidates to make a well-informed decision.
While franchisors are required to present you with an FDD, they are not required to include an Item 19. There are any number of valid reasons why a franchisor may choose not include an Item 19. But make it your second most important question, “Why not?”
If you choose to own your own business and join a franchise system, don’t be surprised if history repeats itself: as you monitor your sales and profit growth and success of the business, you may find yourself asking, “Are we there yet?” And when you reach your personal and financial goals, you’ll deservedly want to celebrate and inquire, “Where’s the party?”