Who really has the power in the franchise relationship? You do! Who are you? You are a prospective franchisee, and you have a lot more power than you think you do. How do I know this? Because market forces are very much alive and functioning – in your favor – in franchising.
One of the fundamental questions that prospective franchisees ask is "how much money can I make?" For a lot of very good reasons, the Federal Trade Commission (FTC), the government agency that governs franchising, has not made answering this question a requirement to sell franchises. Some of those good reasons include the inability to access consistent reliable information across the entire franchise network, questions of accuracy, and whether the data is representative since some franchises have various business elements that make it difficult or impossible for some brands to answer this question.
However, this is a question that you as a prospective franchisee should absolutely ask and get an answer to before you sign a franchise agreement. Since it isn't a requirement – and because the majority of franchise companies are privately held – you would imagine that many franchisors would not share this information, for competitive reasons or because they simply don’t have to. But it turns out the opposite is the case.
The International Franchise Association sponsored a study performed by FRANdata to understand trends related to the visibility that prospective franchisees have into the performance of franchised operations. The results show that brands have taken steps to be more open about how much money is being made.
In 2014, 52% of franchisors provided financial performance data voluntarily. This increased by 27% in two years, and by 2016 two-thirds of all franchisors provided some financial disclosures.
Why do you think that disclosure increased so quickly in such a short period of time? It wasn’t a rule change; the FTC rule that has made the sharing of this information optional has been in place for nearly 40 years.
The change happened because buyers demanded more information. The franchise systems that share financial performance data grow faster because buyers tend to invest in those franchise systems that help them understand whether the opportunity aligns with their expectations and business objectives. If you have access to earnings information, you can make a more informed decision.
This is a reason that Forbes wanted the Best and Worst Franchises To Buy analysis to include financial performance representations. Furthermore, the methodology for the list has evolved to include an evaluation of the quantity and quality of the information provided to prospective franchisees.
If we look at the highest ranked brands for each of the investment categories, it is glaringly evident how much power franchisees have. Each of these brands started franchising around the same time and has grown from two to three locations to over ten times their size, collectively adding 934 locations in 12 years. Each of the high-ranked franchises has provided detailed financial performance representations since they began franchising.
Brightstar is the highest ranked franchise in the lowest investment category. Brightstar provided financial performance representations including gross billings, payroll costs, payroll related costs and gross margin for two of their locations along with the demographics of where those locations were situated the first year they started franchising in 2006.
Nothing Bundt Cakes, the highest ranked brand in the medium investment category, provided financial performance representations for three locations, including net revenues, cost of goods sold and gross profit when they started franchising in 2006. And last but not least, Freddy’s Frozen Custard & Steakburgers, the highest ranked franchise in the highest investment category, provided weekly gross receipts (average, minimum, maximum), cost of sales, labor and controllable expenses as a percent of gross receipts for two locations that were located in former restaurant buildings since their franchise inception in 2004.
Forbes isn't the only one that has picked up on the importance of earnings information. Lenders value it as well. Lenders with over a trillion dollars in assets use a franchise credit score called the FUND report to tell them the likelihood that you or any other franchisee has the ability to repay a loan based on performance history and leading indicators of how the franchise brand will perform in the future.
Close to 20% of the total FUND score is based on franchisee financial performance. This is important because your access to financing and the loan terms you receive may be affected based on the franchise system’s credit score. The chart below outlines the score ranges and what it means to a franchisee borrower.
For perspective, Primrose School is fifth on the "Best" list for the high investment category, and it’s FUND credit score is a 905. That's why franchisees with Primrose get the best terms available from lenders. Two Men & A Truck is fifth on the "Best" list for the medium investment category and its score is 835. Its franchisees also receive the best terms available.
Remember, you have the power. You need information to make an informed decision about a franchise to invest in. If it isn't provided, then you should ask for it. If they can't or won’t provide it, move on to the next franchise. There are thousands of opportunities for you to choose from. Remember, the power lies with you.
