How a Franchise Agreement and a Franchise Disclosure Document differ
There are two documents that are of vital importance...
Many franchisors in North
America are reluctant to provide earning claims in their disclosure
documents. In the United States projections have been in the past
such a cause for franchisees to take legal action (when they did
not achieve projections) that the majority of franchisors today
simply do not provide projections or any form of an earnings claim.
If they are provided, US franchise laws require that such earning
statements be fully explained and substantiated in Uniform
Franchise Offering Circular. In Canada there are disclosure laws in
Ontario and Alberta that have similar earning claim requirements.
The balance of Canada is buyer beware. If the projections are
provided, how do you know that they are accurate and applicable to
the market and location you are specifically looking at? How can
you make a fully informed business decision and protect
yourself?
In order to make a fully informed decision, it is important that you do your research. If the franchisor does provide numbers to you, do not rely fully on the statements and projections that are provided. Projections are simply estimates of what the business might make. They are often based on the franchisor’s experience. But inevitably they are accompanied with long statements such as, “The actual gross sales achieved by any given franchisee will differ from the gross sales scenarios shown on the Proforma Financial Statements. The Franchisor makes no representations that any given franchisee will or should expect to achieve any of the gross sales scenarios shown on the Proforma Financial Statements. “ These projections are designed to entice interest but may not necessarily reflect what will actually happen. The projections provided may reflect averages or may instead reflect the best operating store. It may reflect a corporate store and not a franchise. When receiving projections always ask where the numbers come from and what substantiates these numbers. What do the numbers really represent? Seek clarity and get the clarity in writing.
There are a lot of variables in operating a business. Competition, economy, labor market, traffic patterns and possibly the biggest influencing factor is the operator himself. Through his implementation of the business operating system and his commitment to the business one can dramatically influence of the profitability of the business. There are numerous examples of where someone has taken over an existing location and with the product and same location they have dramatically changed the profitability of the business.
How does one protect oneself? The key is to validate the numbers. Talk to an accountant. Business consultants can also assist. The best source of validation is from the existing franchisees themselves. Call as many franchisees as you can. Ask them questions such as;
Some other financial resources are available to you. Performance Plus is an on-line performance benchmarking tool provided by the government of Canada. It provides detailed financial and employment data on more than 600 business sectors across Canada. It can provide you with average incomes of similar businesses across Canada. You can access this information at http://strategis.ic.gc.ca/sc_mangb/sme/engdoc/homepage.html Another resource available is the book How Much Can I Make? by Robert Bond, Source Books Publications. The numbers are based on US locations but can provide some insight. This book provides recent actual sales, costs and/or profit data or guidelines on over 140 broad-based franchise systems. The list runs from the McDonald's and Taco Bell's of the world to newer, smaller franchises with only a few operating units. Major industry categories are covered.
Being in business for yourself is a lot of hard work. Start the hard work before you open your business by doing your due diligence to make sure that you are making a fully informed decision. Look at all the expenses carefully and validate each one where possible.
By going in fully informed, you will sleep better at night, rather than tossing and turning wondering if you have made the right decision. You will have the comfort of knowing that your efforts will directly effect your success and that your financial expectations are realistic and attainable.
Wayne Maillet is the principal of Franchise Specialists, and a full-time franchise consultant. He has over 20 years of experience in franchising and works with several franchisors in growing and developing their brands. Mr. Maillet lives in Vancouver and can be reached at 604.941.4361 His e-mail address is franchisespecialists@shaw.ca Franchise Specialists web site can be found at www.franchisespecialists.com
In order to make a fully informed decision, it is important that you do your research. If the franchisor does provide numbers to you, do not rely fully on the statements and projections that are provided. Projections are simply estimates of what the business might make. They are often based on the franchisor’s experience. But inevitably they are accompanied with long statements such as, “The actual gross sales achieved by any given franchisee will differ from the gross sales scenarios shown on the Proforma Financial Statements. The Franchisor makes no representations that any given franchisee will or should expect to achieve any of the gross sales scenarios shown on the Proforma Financial Statements. “ These projections are designed to entice interest but may not necessarily reflect what will actually happen. The projections provided may reflect averages or may instead reflect the best operating store. It may reflect a corporate store and not a franchise. When receiving projections always ask where the numbers come from and what substantiates these numbers. What do the numbers really represent? Seek clarity and get the clarity in writing.
There are a lot of variables in operating a business. Competition, economy, labor market, traffic patterns and possibly the biggest influencing factor is the operator himself. Through his implementation of the business operating system and his commitment to the business one can dramatically influence of the profitability of the business. There are numerous examples of where someone has taken over an existing location and with the product and same location they have dramatically changed the profitability of the business.
How does one protect oneself? The key is to validate the numbers. Talk to an accountant. Business consultants can also assist. The best source of validation is from the existing franchisees themselves. Call as many franchisees as you can. Ask them questions such as;
- Has the business lived up to your financial expectations?
- Were the projections that you were provided by the Franchisor realistic?
- What are your profits as a percentage of sales?
- What are the average sales for franchisees?
Some other financial resources are available to you. Performance Plus is an on-line performance benchmarking tool provided by the government of Canada. It provides detailed financial and employment data on more than 600 business sectors across Canada. It can provide you with average incomes of similar businesses across Canada. You can access this information at http://strategis.ic.gc.ca/sc_mangb/sme/engdoc/homepage.html Another resource available is the book How Much Can I Make? by Robert Bond, Source Books Publications. The numbers are based on US locations but can provide some insight. This book provides recent actual sales, costs and/or profit data or guidelines on over 140 broad-based franchise systems. The list runs from the McDonald's and Taco Bell's of the world to newer, smaller franchises with only a few operating units. Major industry categories are covered.
Being in business for yourself is a lot of hard work. Start the hard work before you open your business by doing your due diligence to make sure that you are making a fully informed decision. Look at all the expenses carefully and validate each one where possible.
By going in fully informed, you will sleep better at night, rather than tossing and turning wondering if you have made the right decision. You will have the comfort of knowing that your efforts will directly effect your success and that your financial expectations are realistic and attainable.
Wayne Maillet is the principal of Franchise Specialists, and a full-time franchise consultant. He has over 20 years of experience in franchising and works with several franchisors in growing and developing their brands. Mr. Maillet lives in Vancouver and can be reached at 604.941.4361 His e-mail address is franchisespecialists@shaw.ca Franchise Specialists web site can be found at www.franchisespecialists.com
