When speaking to a perspective candidate, we recommend that you request a copy of the Franchise Disclosure Document after the introductory call. To help you use your time in the most efficient manner, here are the top 3 three items to target when reviewing the document.
The Franchisor’s Corporate Financial Statements
In the Table of Contents of the FDD, you will find an exhibit that has the franchisor’s balance and income statements for their corporation. The International Franchise Association (IFA) recommends an acceptable balance sheet ratio of 2:1 of total assets to total liabilities. For example, if the assets are $1M, then the liabilities cannot exceed $500K, in order to meet this guideline. With the income statement review, the ratios are even more prudent. The IFA recommends a 3:1 ratio of revenue to all line-itemed expenses. For example if the franchisor’s top line sales are $3M, the expenses should not exceed $1M. We also like to analyze the cash equivalents at the beginning of the year and compare them to the year-end figures and see how these numbers are trending.
Item 20—Number of Outlets
After reviewing the corporate financials, we target the number of outlets the franchisor has at the end of the three previous years. If the outlets are increasing positively in 2013, then this figure should correlate positively to royalty payment in the income statement for 2013. If the franchisor is losing franchisees every year, and it exceeds more than 5%, you will need to find out from the franchisor why the numbers are deteriorating. Typically, you will see weaker royalty payments, as the number of outlets decreases yearly.
Item 19—Financial Performance Representation
This item is often referred to the “earnings claims” and it is much easier to complete due diligence if this information is published in the FDD. We recommend that you read all the details in this item thoroughly and have the franchisor go over this item in fine detail. When comparing one franchise company with another, in the same segment, we recommend that you complete a side-by-side comparison and analyze these 3 items first so that you do not waste endless time going through this large document.
Completing due diligence is time consuming but very necessary when purchasing a franchise. There are several additional items you will need to focus on but these three items will “weed out” the weaker brands in the initial stages of your search, as franchise consultants, we can help you with this process.
"I was transitioning from 20 years of military service in the Navy to the uncertain waters of civilian life.I was very unsure of what I wanted to do, and happened upon FranFinders. Within a day or so, Sue called me with lots of great information and advice. Sue and Rob selected a dozen or so businesses that they felt were right for me, and their number one choice became my number one choice. Their extensive business and franchising experience combined with their patience and honesty made the process much smoother and much less stressful. They knew every step, and made sure I was well prepared for each hurdle along the way. Despite my complete inexperience in business, they never made me feel like I was in too far over my head. They offered encouragement as much as wisdom. They were available to me anytime I needed them. I can honestly say I couldn't have done it without them. I highly encourage anyone interested in pursuing franchise ownership to give FranFinders a call...you will not be disappointed!"