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When researching franchise opportunities, you’ll spend a significant amount of time reviewing franchise financial information. And it’s common to wonder: can I trust the information that franchisors provide?
Fortunately in this case, the Federal Trade Commission strictly regulates franchise sales. Statutes and regulations govern the franchise sales process, as well as the documents and disclosures that franchisors give prospective franchisees. So the answer is yes, you should be able to trust the franchisor’s financial disclosures. Otherwise, the franchisor is violating federal law. That said, it’s important to know that the disclosures only represent past performance of units that are/were open. They’re not a predictor of future costs, revenues, or profits. For this reason, it’s especially important to do careful due diligence.
The FTC Franchise Rule
In 1979, the Federal Trade Commission introduced a “franchise rule.” This was its first step to regulate the sale of franchises. While these FTC regulations have changed over time, the basic tenets remain consistent.
Critical sections of the FTC’s franchise regulations govern the content and format of the Franchise Disclosure Document (FDD). The FDD is a legal document that a franchisor must give to individuals interested in buying a franchise. It is a critical source of information, and you’ll want to carefully review it during your due diligence process.
The FDD, Item 19, and franchise financial information
Financial performance representations can take a variety of forms. They include any statement that promises that a prospective franchisee will be able to achieve a specific financial goal. Statements regarding potential sales, income, or profits are financial performance representations.
Financial performance disclosures can be found in Item 19 of the FDD. They are the only disclosures that are optional for franchisors. When a franchisor chooses not to make a financial performance representation, it must state so clearly in its FDD.
If the franchisor you are researching does not make financial performance representations in its FDD, never fear. There are other ways to search for financial data. Make sure to ask existing and former franchisees in the system for information regarding their own historical performance. Their contact information will be listed in Item 20 of the FDD. Note that franchisees are generally not subject to the same restrictions as the franchisor that govern the sharing of financial information.
What financial performance information can the franchisor provide you?
When a franchisor does provide a financial representation, it must first disclose that same specific information within Item 19 of its FDD. In other words, the franchisor cannot provide any specific financial information during the sales process unless it has previously disclosed that same information within Item 19 of its FDD. If the franchisor chooses not to include financial performance representations in its FDD (which is permissible), it cannot provide prospective franchisees with any information on sales or earnings.
So, this all means that thanks to federal regulation, many franchisors will provide you information on their franchise’s past performance. Make sure to evaluate it carefully, as well as the information you gather through talking with existing franchisees, in order to prepare your own financial projections.Read More
If you’re interested in owning a franchise but don’t want to devote full-time hours to it, consider semi-absentee franchise ownership. This model appeals to people in a variety of situations. Some want to keep their day job while growing a business on the side, while others are looking toward retirement and want to build an asset they can pass to their children. Some people want to grow a business as part of a portfolio of businesses. All of these scenarios are compatible with the semi-absentee ownership model.
You won’t need to put in 40 hours a week
Semi-absentee ownership enables you (the owner) to successfully operate the business while maintaining another career or obligation. It contrasts with a business that requires your full-time effort and constant presence. Note, however, that semi-absentee ownership may require a full-time effort at the beginning, in order to get the business up and running. The difference is that once you’ve completed the ramp-up period and the business is established, you’ll only need to put in 10-20 hours per week.
Look specifically for a semi-absentee ownership opportunity
Here’s what not to do: try to convert a business designed for full-time ownership into a semi-absentee model. That’s a recipe for disaster. Rather, look for franchise opportunities specifically structured for semi-absentee ownership. Brands that embrace this model span many industries and formats. They include brick and mortar stores (such as hair salons, massage therapy studios, and more), mobile concepts, consulting and advisory services, and many other businesses. The possibilities are vast!
Make sure you know what you’re getting into
Be aware that semi-absentee ownership typically involves a longer development or ramp-up period compared to a full-time endeavor. Another thing to consider is that with this model, you’re likely to be managing people you hire to interface with consumers and clients. Be sure to take that into account when determining whether your skills and preferences align with a semi-absentee role.
Remember to do your due diligence
In conclusion, owning a franchise doesn’t require you to give up your day job. You can begin diversifying your income and move away from being fully dependent on your paycheck by pursuing semi-absentee ownership. Make sure that whatever model you pursue fits well with your long-term goals, skills/talents, and time availability. As long as you’re willing to put in the effort, do your research, and keep an open mind, you’ll be on a good path.Read More