Fdd's Item 19 Can Help You resolve If a Franchise Will Meet Your Goals

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There has been a growing trend in the world of franchising to tell candidates more about their earnings potential. Item 19 in the Franchise Disclosure Document (Fdd) is the section that provides details on earnings, costs, and other factors likely to sway future financial execution after a candidate signs on to become a franchisee.

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Today's franchisee prospects have become increasingly sophisticated in their quest process, with more and more seeing for hard numbers to give them deeper insight into the earnings potential of a franchise brand. Some franchisors contribute these earnings claims (now called financial execution representations, or Fprs); others refrain, implicated about the legal liability of production such claims. But, when done properly, Fprs contribute a contentious edge as a sales tool for the franchisor. Providing straightforward, significant financial data to prospects goes a long way toward developing trust.

Fred Harms is vice president of improvement at Kiddie Academy (92 units open and 63 in varied stages of development), and says this is what he likes to tell prospects when discussing his company's Fpr: "Look, this is your midpoint Roi Ebidta. It ranges from a low of this to high of this, and low is honestly horrible. You have some unprofitable franchisees. Are you best than average? I can tell you how to be." In the sales process, he says, Item 19 is the franchisor's response to the inquire on every candidate's mind: "How much money can I make?"

Charlie Simpson, administrative vice president and Coo of Great Clips says if you can tell prospects what it costs but not how much they can make, the response usually runs something like: "What do you have to hide? The other five fellowships will tell me. Why not you?"

When your franchise is solid, says Simpson, "An earnings claim is an occasion to showcase your company. It provides instant credibility with a candidate because you have one."

And, he says, it's significant for franchise prospects to read the Fdd completely. "When they get this document, first of all, the biggest guidance is 'You honestly should read it.' I know from sense that most candidates don't," says Simpson.

If you get an Fdd and there is no Item 19, he says, ask a very direct question: Why not? "How they respond to that will you give you a perceive of the integrity and the sustainability of that franchise."

Perhaps the most prominent advantage of Item 19 is to give candidates the data they need to originate a realistic scenario about what lies ahead if they sign--not only of their potential Roi, but of what's required to achieve that in their market. Disclosing earnings data also expedites the decision process. Without an Fpr it could take months before a candidate finally figures out if that franchise is the right fit for them or not.

Gary Robins, a flourishing franchisee who owns 30 Supercuts and Cost Cutters salons in Pennsylvania and New Jersey, knows a thing or two about earnings claims. "I honestly like agreements with earnings claims more than agreements without them," says Robins, "I use them to analyze the business risk and the return on investment."

Robins says he's all the time seeing for good opportunities--not one or two units, but 10 or 20--so he examines the "context" of the numbers presented in Item 19. "You need to understand what you're seeing at--sales, not expenses, and the class of shop they're giving you." For example, if a brand has 500 stores, he might be seeing at a sample of 100 shop open 5 or more years; that is, their most mature, flourishing stores. "You have to look intimately at the data," he advises.
As an experienced reader of Fdds, Robins says he is seeing more sales data disclosed than in past years, but many franchisors are still leaving charge data out of their Item 19 numbers. "I guess it's helpful, and a step in the right direction," he says.

"Whether there is an earnings claim in the deal or not, I have to get insight into the business model--whether through an earnings claim or seeing at franchisee financials," he says. "I would not tour without having a direct earnings claim or an indirect earnings claim."

Financial execution representations help present a realistic--and detailed--picture of the likely road ahead for franchise candidates. Make sure you take a hard look at the road map before setting out on your journey as a franchisee.

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