Finding franchise opportunities isn’t easy on your own. It’s hard enough to find reliable information about the franchisor you’re researching given that most do their best to present their brand in the best possible light, but making sense of financial statements and Franchise Disclosure Documents (FDDs) is even tougher. Navigating legal and financial documents is a skill that is developed with time, training and experience – three things many newcomers lack!
You don’t need to be a financial guru to make sense of the FDD, but it’s always better to know as much as possible about what you’re getting yourself into!
In today’s post, the FranNet team shares some tips to help you make sense of franchisor financial statements. The following considerations are meant for those interested in finding franchise opportunities in Canada, but established franchisees may also benefit from these tips!
1. Ask Yourself Where the Franchisor Makes Their Money
Franchisors typically generate income in two ways: franchise fees and royalties. Franchising fees are usually a one-time payment, whereas royalties roll in continuously as the franchisees make money. Where your franchisor makes their money will have different implications depending on your industry.
Take note of the ratio of new franchisees versus total revenue.
If you’re looking for a franchise in retail or food, then ideally your franchisor makes their money from royalties, which would indicate their brand is profitable. The franchise is meant to sell product, and they do. If their money comes largely from signing on new people, consider this a potential red flag.
High franchise fee income is not always a red flag, though. A new franchisor will probably generate most of their money from franchising fees because the system is still developing. When in doubt, check in with your FranNet adviser – consultations are always completely free.
2. Hack the Doc: A Handy Trick to Estimate Average Sales per Location
This “hack” can be used to inform your franchise research. All you need is access to the franchisor’s financial documents, most of which they will share during the lead-up to your signing.
If you have access to royalty rates, you can determine the average sales per location. Simply divide the total royalty revenue by the royalty rate that your franchisor discloses in their statements. You can then divide the system-wide sales by the total unit count to estimate what kind of money each location makes. Once you determine this figure, you can combine it with your own personal assessment of the franchisees’ performances to determine whether or not this opportunity is right for you.
3. Mind the Footnotes
FDDs usually include very interesting details in the footnotes. Though some franchisors will go out of their way to maintain a squeaky-clean public image, they may be obligated to disclose some unflattering facts in the footnotes. You can find out everything from details on corporate office structure to pending lawsuits in the FDD.
Want more tips on how to make sense of the mounds of paperwork required before you fulfill your franchise dreams? FranNet consultants can help you every step of the way. You’ll never feel overwhelmed by the litigious side of things again; book a free consultation with our team and get expert help finding franchise opportunities in your area.
About FranNet Canada
FranNet is a 29-year-old company with roots in the U.S. Its purpose is to nurture every entrepreneur’s dream of business ownership. We actively employ a specific profiling and consultation method. This method is geared to each investor with a specific business model and based on franchise trends typically found in Toronto, Ontario, Vancouver, British Columbia, or Calgary, Alberta. The most lucrative Canadian franchise opportunities are waiting for you.