Selecting a brand to franchise requires more than just how the brand stays on top of its competition but also how it makes use of opportunities and operates to make sure the business profits even at the start of its franchise operations. The best way to figure which brand is correct is to read the Franchise Disclosure Document (or FDD).
The Federal Trade Commission requires FDD’s to be disclosed to franchise investors to ensure that they get detailed information to compare franchise opportunities better. One item that needs to be carefully analyzed is item 19.
What’s in item 19?
Item 19 informs the reader of the performance of the franchised units and how the performance of a franchise will most likely be. You can expect detailed performance presentations to project the earnings with the franchise business. Franchisees must ask where they can get financial information about a brand, and the right place to look is item 19 of the FDD.
Franchise strategies are best made after reading item 19. This is where you will find the complete profit and loss statements and the average gross sales figures, and if franchisors want to make sure you get all you need before you commit, they include a table of gross sales regardless of where the franchise is located.
Are You Getting What You Need in Item 19?
Item 19 is always industry-specific, and with this, the more information you get about a brand, the better the decision you will make. This is where you begin to make your financial plan. For example, if you want to get into the food franchising business, will the delivery system be centralized? If so, how will you go about advertising, promotion, and deal with possible problems along the way?
The declarations made under item 19 must be carefully compared to how the kind of business regularly behaves in the market as well. The comparison of gross income over time helps you see how the franchise will succeed. For example, a restaurant that grossed $1.4 million two years ago might earn you more now because restaurants are eyeing a sales jump of up to 10.2% in 2021.
Item 19’s Legal Requirements
A franchisor is free to put information in item 19 for as long as the franchisor upholds legal standards. What should be revealed in item 19? Reasonable basis, reasonable assumptions, and substantiation must be found in item 19.
This item must also include the necessary caution that the franchisee’s earnings might differ, which is essential and expected. Location, target market, and advertising strategy count a lot in franchising operations. Item 19 protects both parties from confusion and clarifies possible downsides in the operations and profits.
What to Do If Item 19 is Not in the FDD?
Item 19 has prescribed standards. However, it is not required by law. Should you distance yourself from disclosures that do not have item 19? Not necessarily because there are other sources to get them. If item 19 is not in the disclosure, then be ready to take a few steps to get more insights before you jump to a decision.
Every FDD includes a list of franchisees that you can contact. You can choose to contact the franchisees to know more about their franchising experience with the brand, including their cash flow statements. If the item does not do so much, item 20 will be a great help.
Item 20 informs franchisees of the brand’s system size and growth data. Meanwhile, item 21 is where the franchisor’s financial statements are. Thoroughly look at the remaining items in the disclosure. A franchise system observes and records business cycles every year, and you will find more of what you need to know in item 20. It will be a bonus for you if the brand has been in the franchising business for a long time. You need to see how many franchisees are existing and see the percentage of leavers.
What’s your franchise appetite? An accessible and transparent Franchise Disclosure Document (FDD) is important for prospective franchisees to ensure that the information presented by a franchisor is complete, accurate, and meets legal standards. Markets change rapidly, and the pandemic is just one in many that can change consumer behavior. Examine the franchising system of the brand you are looking at, and make sure you have comprehensively looked into a brand’s franchise opportunities before you say yes.
It is essential to be aware of how to analyze the FDD’s Item 19 to make the best possible decision when choosing a brand to franchise. It gives you a better idea of what to expect with the franchise and its potential.