FranNet’s CEO, Jania Bailey, delves into the significance of encountering the phrase “sold but not open” within a franchisor’s Item 20 disclosure. She highlights the importance of scrutinizing this when franchisors are selling multi-unit packages, emphasizing the need for a well-structured development plan. A surplus of “sold but not open” entries in the Franchise Disclosure Document (FDD) could potentially raise concerns. Jania offers guidance on essential questions to pose, ensuring you don’t endure lengthy delays in launching your new franchise location, potentially waiting for a year or more.
Video Transcript –
That is an area that was really ignored for a long time – and here are the kinds of things you want to think about. Some franchisors sell what we call multi-unit packs (so three packs, ten packs). So I sell you a three-pack of this. Well, you’re not going to open all three of them at the same time. They should have a development plan in place for you. So you get your first one up and operational, how soon do you have to open the second or third?
If I see a lot of sold but not opened on a report of a franchisor, I want to know how many of those are current on their development plans. So you opened one, have been open for ten years, and haven’t bothered to open the second and third. Why? That’d be a red flag. Or if they’re a fast-growing franchise and they’ve got a lot of sold and not opened, that can actually tell us that they don’t have the resources to adequately support the franchisees to get open – they’re not getting help to find the right locations, they don’t have the real estate department or people to help them with build-outs and that sort of thing.
So sold but not open means they’ve grabbed all the cash on the front end but they may have a lot of people out there who have been waiting for a location for a year or more. Those are red flags. More questions have to be asked at that point.