Show me the money

by Kate on March 28, 2010

“How much money can I make?” This is usually a prospective franchisee’s first or second question. Whether expressed or not, when they consider starting a business, people want and need to understand what financial return is possible.

Although not required, The Franchising Code of Conduct allows earnings information to be included in the disclosure document and I think franchisors should consider providing information on historic revenue and costs.

I see several important benefits for franchisors that choose to provide such information:

  • Provides a starting point for prospects to understand the costs of doing business, how long it takes to reach breakeven and whether the business will enable them to reach their goals.
  • Enables recruitment managers to provide documentation rather than relying solely on (often verbal) information from existing franchisees.
  • Makes it easy to provide information about franchise performance to accountants and bankers.
  • Helps keep franchisor focus on the financial health of the network.

Of course, disclosure must be accurate and comply with the law – which requires some cost and effort. Still, clear information can be a real benefit especially given competition for franchisees and with increasing attention on transparency.

However, whilst many franchise executives are inclined to consider how they might provide additional disclosure, the challenge is often how to make the move towards providing this.

Networks can be limited by lack of information, either because their system is emerging or small or they simply don’t collect the data. Some are unsure how to present the information in a way that makes sense and complies with the law. Unfortunately, some don’t disclose because actual results are below what is expected.

In practice, it’s important not to get too caught up with infrastructure and process. At first, there may not be enough information available to support disclosure, but a franchisor who can demonstrate genuine action on performance will surely be well placed when it comes to attracting and converting prospects.

A simple way to do this is by collecting franchisee financial statements and benchmarking revenue and costs at least once a year; certainly this is do-able with commitment and focused attention.

What’s important isn’t the information and disclosure practice itself but the culture underpinning it. In practice, a franchisor might decide not to disclose for valid reasons (prospects should simply inquire as to the reasons), but they can and should be able to demonstrate their commitment to franchisee profit in a visible way.

Here are some things that a prospect might look out for in a franchise that is committed to franchisee profit:

  • Supports franchisees to set budgets.
  • Collects, analyses and reports cost and profit information regularly (say, quarterly or at least once a year)
  • Provides support to review results and identify areas for attention to improve profit, cash and value.

For franchisors what’s important is to provide evidence of what you do: for example samples of the feedback you provide, meeting action plans and so on, since this demonstrates your commitment in reality.

Over time, practices like these will enable franchise executives to provide financial disclosure to prospects — if they chose to do so. Regardless, it leaves them well placed to provide evidence of a profit culture and the outcomes from this.

As Eliza Doolittle says in My Fair Lady: “Tell me no dreams filled with desire. If you’re on fire, Show me!”

If your network delivers profits worth shouting about, let’s hear about them.

{ 3 comments… read them below or add one }

1 Kate Groom May 24, 2010 at 5:51 am

Sean,
Thanks for commenting on this important topic.

Providing financial information in disclosure really does simplify things by doing away with the need for the ‘napkin’ based approach to reassuring prospects the concept is money making.

When it comes to green field opportunities, whilst specific information isn’t available for the site, franchisors can provide financial information in the disclosure document in the form of historical data based on existing network results. This helps prospects and their advisers to create their budgets and can guide people to be realistic about what might be possible in their circumstances.

I’m hearing more lawyers express the view that appropriately presented financial disclosure is something to be encouraged, which is a real help to ensuring financially healthy franchising.

Kate

2 Sean O'Donnell May 21, 2010 at 9:43 am

Kate,

As you know this is something I have been passionate about for many years. I see so many disputes both as an advisor and mediator where the prime allegation is along the lines “I was told by bloggs of the franchisor that I would make x if my sales were y per week. This is why I decided to purchase the franchise”.
Many franchisors counter with “we do not make any earnings claims…look at our disclosure document”. Of course and with no disrespect, the person from the franchisor saying this usually had absolutely nothing to do with the franchisee’s recruitment, so they really have no idea what was said. It also amazes me how many franchisees can produce some piece of paper or the famous ‘napkin’ which does show figures which the franchisee says supports their claim.
If a matter ever gets to court I don’t think too many judges will believe that a franchisee spent tens of thousands (or hundreds of thousands) of dollars buying a franchise without someone at the franchisor saying how much money they were likely to make. Therefore, why not give financial information which is accurate and have the appropriate disclaimers. Then the franchisor can better control what is given or said about financials or projections and avoid the ‘napkin’ becoming exhibit 1 in a court case!
Of course, this may not be possible in every case. Green field sites would be an example but for any established site in a proven system, there seems no reason why financials cannot be provided. I agree, if a system is profitable why not brag about it with accurate financial data.

Sean

3 Chris Khoo May 19, 2010 at 5:36 pm

Hi Kate

Thanks, your posts are really helpful in terms of understanding the mind of the franchisor – and also to provide an indication of how mature their processes are.

Chris

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