Thinking About Cross-Border Franchising? US Brands are Becoming More Transparent
The International Franchise Association (IFA) reports that US franchises are providing more financial performance information on their disclosures, which is great news for Canadians who are interested in opening up a US-based franchise location here (http://www.franchise.org/new-report-shows-franchises-providing-financial-disclosure-at-higher-rate-than-ever). According to a report for the Franchise Education and Research Foundation, US companies are increasingly disclosing financial performance information under the "Item 19" label of their disclosure documents despite not being legally required to do so. The increased transparency helps prospective franchisees more thoroughly evaluate an opportunity and makes it easier for them to access capital.
IFA President and CEO Robert Cresanti praised the trend, saying that when prospective franchisees can do their research more in-depth, it creates more success and healthier systems overall. The president noted that the current US laws make financial performance disclosures voluntary, which isn't helpful to investors or lenders, but market forces have prompted franchises to provide this information on their own.
The report took a look at the importance of financial performance disclosures to lenders and potential franchisees. It also evaluated the transparency patterns in this type of disclosure over time, which uncovered the following trends:
• 52 percent of franchisors provided financial performance information in 2014, and this number went up to 66 percent for 2016.
• Over 92 percent of franchisees said financial performance data helped them research their opportunity and craft a business plan.
• An astounding 97 percent of lenders said they were more likely to loan money to a franchisee if the brand provides financial performance information in its disclosure.
• 47 percent of franchisors disclosed their operating expenses, while 24 percent provided data about profitability.
The research in the report was a mix of in-house data analysis, a franchisee survey and a survey of franchise lenders. More than 3,000 brands were examined from 2014 to 2017 to uncover trends in financial performance disclosures over time, and the quality of all information was considered before inclusion.
When you are a Canadian evaluating a US-based brand, you do have extra considerations, so increased performance transparency can be a real advantage. Always remember that franchise agreements for US brands may not conform to Canadian laws and can have tax implications and other logistic issues. If you want to be on the safe side, have any agreement from a US brand reviewed by an experienced Canadian franchise attorney before you sign on.