Your franchise disclosure document (FDD) is an opportunity to sell candidates on your system. Unfortunately, many franchisors don’t take full advantage of this opportunity.
Including a thorough Item 19, or financial performance representation, helps franchisors connect with the right franchisee candidates. However, many still choose to forego the report. There are a few potential reasons for this decision:
1. It’s too challenging to collect and synthesize unit-level financial data from the system’s franchisees
2. The franchisor can’t confirm the accuracy of the data they’ve received from franchisees
3. The system is too new to collect helpful unit-level data
4. The numbers are unimpressive, so the franchisor would rather keep them under wraps. (In which case, why are you franchising?)
As you might guess, none of these possibilities strike the right note with a savvy, qualified candidate. Now, franchising experts advise potential investors to focus on concepts that are willing to share both sales and costs, making transparency the most strategic approach to franchise development.
Here are a few ways that a detailed financial performance representation can improve your franchise development sales process:
It Sets You Apart
As in any relationship, trust is essential to a healthy franchisor-franchisee dynamic. Many franchisors choose not to disclose financial data or to include information in an Item 19 that is unhelpful, confusing or even outright misleading. By including a simple and thorough financial performance representation in your FDD, you immediately establish your company as honest and forthcoming.
Yes, it takes time to collect performance data from franchisees and confirm its accuracy. But this project will be worth it when you have a well-crafted financial performance representation that you can use as a sales resource with candidates (Not to mention all the other ways these metrics can contribute to growth).
If you choose not to include a financial performance representation, be ready to explain why. You don’t want candidates to feel like you’re hiding something.
It Puts You in Control
Including a financial performance representation in your FDD gives you more control over the conversation surrounding franchisee performance.
For example, there might be some underperforming franchisees dragging down your average return on investment range or average earnings before interest, taxes, depreciation and amortization range (ROI or EBITDA). If you disclose the range, you can directly address the issue with candidates and explain how to avoid poor unit-level performance.
Fred Harms, vice president of development at Kiddie Academy (with 92 units open and 63 in various stages of development) told Franchising.com that he speaks candidly about low numbers with potential franchisees and maintains control of the narrative. He acknowledges when certain figures reflect poorly on the system, and he breaks down what steps the candidate can take to achieve above-average results.
Now, let’s say that you chose not to disclose any information about earnings or costs. Your candidates won’t move forward without an understanding of the business model and their potential earnings, so they’ll likely start calling your existing franchisees. If they end up on the phone with a disgruntled, underperforming owner, you probably will not hear from that candidate again.
You can’t squash candidates’ curiosity about potential earnings, so it’s a much better approach to be transparent and remain an active part of those conversations.
It Speeds Up the Sales Process
The top-of-mind question for potential franchisees is, “How much can I make in this business?”
If you don’t answer this question, they likely won’t continue through the process uninformed. They’ll do their research. They’ll hire a franchise attorney, consultant, advisor or accountant. They’ll start calling franchisees in your system.
Being tight-lipped about earnings slows down your franchise sales. By providing information up front about earnings, sales and what it takes to succeed, you make the process easier for the candidate and increase the likelihood of a sale.
It Builds Confidence and Trust
Because of the Internet, franchise candidates today can find more information than ever before about your concept and your competition. The more transparent you are in providing this information up front, the more you help them streamline their due diligence. You also build trust in your future relationship from day one.
Candidates take a very linear approach to making franchise investment decisions today. If you are fighting that system by withholding important information, they will distrust your concept and lack confidence in your ability to deliver. With thousands of franchise options to choose from, you will make it easy for them to move on to a similar concept that’s willing to provide critical financial data.
Winmark Franchise Partners
With 30 years of franchising experience and more than 800 franchise owners representing more than 1,200 locations for five brands, Winmark Franchise Partners can help you grow your brand through sound strategy and expert franchising advice and services. For more information, or for help putting together a financial performance representation or franchise disclosure document, contact us here or at (844) 452-4600.