Franchising

If you are purchasing a restaurant franchise there are a few items you should know about that are not required to be disclosed in a Franchise Disclosure Document when you buy a franchise. Although the Federal Trade Commission requires disclosure of certain items by law you should be aware of the undisclosed items before you jump in with both feet.

Number One - Franchise buyers who are getting involved with purchasing a franchise for the first time can be broadsided by Item 7 of the Franchise Disclosure Document which requires a statement of working capital needs for the first three months you are in business. This is known as "Additional Funds" according to the Franchise Disclosure Document. If this is your first time purchasing a franchise, it will most likely take you up to two years to break even where your revenue costs equal the costs of selling your product. Meanwhile additional funds will be provided out of your own pocket. For this reason, it is necessary to review the initial build out plus the additional funds estimate and then weigh this against operating in the red for your first two years in the business.

Number Two - Another item that is not disclosed is the amount of revenue the current owner of the franchise is earning with the business. This is Item 19 Financial Performance Representations or Financial Performance of Franchise Owners. According to the laws set forth by the Federal Trade Commission, disclosing financial performance disclosure is optional for the current owner of the franchise. If the owner opts to include financial information you can locate it in Item 19 of the Franchise Disclosure Document under financial performance representations." The fact that the disclosure of financial information is optional would make any franchise buyer wonder why they are investing the money to purchase a franchise when they have no idea what their return on investment will be. On the average, less than 15 percent of all franchise owners disclose financial information. The books and records are available when selling the franchise and they should be available to buyers to help them make the right decision with their investment.

Number Three - You will find that information on the current performance of the franchise is conveniently missing from the Franchise Disclosure Document although the name of the current franchise owner is included in Item 20 of the Franchise Disclosure Document. You will often see a wealth of advice on the Internet about how you should contact franchise owners to learn more about the franchise before you invest. The unfortunate part of using this method is that you will often get a biased opinion and subjective interpretation instead of hearing the true facts about the franchise operation. You can ask them for their financial statement but often they will refuse to disclose them. If they are trying to sell the franchise and they have made some errors along the way, they will not be willing to reveal that in the financial statements. Underneath you will probably ask yourself whether or not you want to buy into the franchise.

Number Four - If franchise owners are motivated sellers and you ask for information on their financial performance, more often than not they will inflate the numbers to hide the fact that they are working long hours each week and only showing a base income of approximately $30,000. Sometimes they do not break down that salary to an hourly wage which results in less than $13.00 per hour.

Number Five - The final piece of information that is undisclosed in the Franchise Disclosure Document are the statistics that show the rate of turnover in franchise ownership. You will find information on the number of units in operation and the number of units that have closed but that is all. What this means for the franchise buyer is that people who have purchased franchise restaurants that have flipped twice, this is still calculated as one unit minus the information on the decrease in value of the unit.

Although these are the disadvantages to buying a franchise or looking for the next big opportunity to purchase a franchise, the franchise market is still robust and continues to grow.