Like any investment, franchising is a gamble for those considering putting their money on the line. To that end, we encourage all players in the industry to disclose as much financial information as possible. A new report by FRANdata suggests franchisors are getting the hint.
According to FRANdata’s report, U.S. franchise brands are increasingly providing financial performance data to prospective investors and lenders. It’s a move the International Franchise Association says is helping create more transparency for prospective ‘zees, as well as greater access to capital from lenders.
The report shows franchise companies are increasingly seeing the value of disclosing certain financial information to prospective investors and lenders under “Item 19” in their Franchise Disclosure Documents (FDDs), without the regulatory requirement to do so.
“IFA believes due diligence by prospective franchise owners creates better-performing franchisees and healthier franchise systems. The current regulatory framework that encourages voluntary financial performance disclosures rather than requiring them allows franchisors to decide which information is most helpful to potential investors and lenders. As a result, market forces have led to more disclosures and greater transparency, once again demonstrating the wisdom of the Federal Trade Commission’s most-recent update to the Franchise Rule,” said IFA President & CEO Robert Cresanti. “Since the adoption of the Federal Trade Commission’s Franchise Rule in 1979, and subsequent revisions, IFA has been a strong proponent of voluntary disclosure.”
The report examined the importance of financial performance representations to the two groups who are key to franchise system growth: prospective franchisees and lenders. It also examined patterns of transparency in financial performance representations over time. Key results from the report show the following trends:
In 2016, 66% of franchisors include financial performance representations in the franchise disclosure documents; this is up from 52% in 2014.
More than 92% of franchisees say that this information helped them understand the opportunity, perform due diligence, and write their business plan.
Forty-seven percent (47%) of franchisors disclose operating expenses, and 24% provide information about profitability, including operating income, earnings before income, taxes, depreciation, and amortization (EBITDA), gross profit, or net income.
97% of lenders say they are more likely to make a loan deal for a franchise brand that provides financial performance information in an item 19.
“When properly disclosed and responsibly interpreted, this information helps franchisees make better investment decisions, lenders make better loan decisions, and franchisors understand and improve their operations. Most importantly, it strengthens the franchise business model overall by allowing performance to be measured, something that simply can’t be done in a comparable way with independent businesses,” said FRANdata CEO Darrell Johnson.
FRANdata’s research was based on a combination of in-house proprietary data analysis, a survey of franchisees, and a survey of franchise lenders. FRANdata examined over 3,000 franchise brands over the three-year period since 2014 to assess trends in franchisor disclosure of system financial performance representations, looking both at the rate of disclosure, as well as quality of the information provided.