If you're looking for a franchise opportunity, it's critical to do your due diligence and take the necessary time to research, evaluate your options and assess whether or not it's a viable venture. After carefully exploring your options and identifying franchise opportunities, you'll have the chance to review the Franchise Disclosure Document (FDD) ahead of signing any agreement. The FDD provides information about the franchisor, the franchise system, the business model and many other aspects of the franchise.
There are 23 items in the FDD that provide all necessary information and requirements you'll need to understand ahead of being awarded the franchise. Of the 23 items, Item 19 is the one most prospective franchisees look at first. Item 19 covers the financial performance representation, which is where the franchisor provides information about sales or other financial data regarding the franchised business.
Here’s a closer look at what is included and how to interpret the information.
What's Included in Item 19?
Generally speaking, Item 19 answers the question, "how much money can I make?" Under the Federal Franchise Rule, a financial performance representation is defined as, "Any representation, including any oral, written, or visual representation, to a prospective franchisee, including a representation in the general media, that states, expressly or by implication, a specific level or range of actual or potential sales, income, gross profits, or net profits. The term includes a chart, table or mathematical calculation that shows possible results based on a combination of variables."
Each franchise is different, and franchisors have the freedom to select the type of Item 19 disclosure that makes sense for their business. While each franchise's Item 19 disclosure can look different and may be industry specific, the more information on a franchise system's financial performance, the better.
What Questions to Ask As a Prospective Franchisee
Part of doing your due diligence as a prospective franchisee is asking the right questions. You must ask questions about the actual or potential financial performance of the franchise. After all, buying into a franchise is a long-term – if not a lifetime – commitment and requires ample investment of your time, energy, resources and finances. At Winmark Corporation®, we encourage potential franchise owners to ask many questions as they'd like. Here are some questions to consider when reviewing the FDD:
- Can you explain the year-over-year differences in financial performance?
- What is the gross revenue for your corporate locations (if the brand owns them)?
- What’s the typical break-even point for franchisees?
- What profit margin should I expect?
How the franchisor reacts and answers these questions should be a critical factor in your decision to franchise with them. However, depending on what's listed in their Item 19, the franchisor may or may not be legally allowed to answer those questions or disclose specific sales numbers. In this case, a franchisor may direct you to their existing franchisees to answer some of these financial questions.
Knowing What to Expect
While you might be eager to learn of hard sales numbers and get an idea of how successful you can be with the franchise, the franchisor won't make a financial performance representation unless the financial data is stated in Item 19 of the FDD. If the FDD doesn't include Item 19 financial performance representations, the franchisor cannot, under any circumstance, disclose or provide franchisee candidates with financial performance data or information.
With a clear understanding of what you can and can't expect in Item 19 and the full FDD, you'll know what to ask, look for and anticipate when it comes to searching for a franchise that's perfect for you. Once you've reviewed the document, asked the appropriate questions and feel confident in your decision, signing is a breeze.
Ready to Join a Franchise?
With over 30 years as a retail resale franchise and a proven record of success, we pride ourselves on being a leading franchise in the space. In fact, over the last ten years, 95% - 100% of our franchisees have renewed their agreements with us, which means, after their ten year agreement is up, they signed another ten year agreement to stay in the franchise system.
Are you looking to join a retail resale franchise that's poised for success? Get started and contact us today!
