In their Franchise Disclosure Document (FDD), franchisors must include a significant amount of information, which is then shared with prospective franchisees, regulators, and lenders. This information includes start-up costs, fees, royalties, the number of units that opened/closed/transferred, obligations by both parties, legal activities, intellectual property, management backgrounds, information about owners, financial performance, territories, franchisor support, and more.
Reporting on the health of the franchisor-franchisee relationship and franchisee satisfaction is omitted. It is important to realize this.
Two of the most arguably most important indicators of brand trajectory are a strong franchisor-franchisee relationship and franchisee satisfaction. And yet, these are not openly documented or mentioned anywhere in the FDD. This is an interesting gap in the current FDD structure, which regulators mandate.
If there are a large number of exits, or numerous disclosed litigation issues, or heavy management turnover from year to year, then a brand’s problems are visible in the FDD. But in many cases, growing trouble is not visible within the context of the FDD.
The FDD might convey quite the opposite impression to outsiders. For example, insiders know that in a strong franchise, most franchisees want to expand. Prospective owners without franchise experience might see multiple new territory sales as a signal of strength. It is essential to know why existing owners aren’t expanding instead. Lack of litigation isn’t automatically a positive signal. Low management turnover doesn’t mean strong value creation for franchisees. Lack of closures doesn’t equal franchisee profitability.
With more than 4,000 active franchise brands, it would not be an overstatement to say that there are possibly hundreds of franchise brands that are stalled out or headed for trouble in plain view. They may have reasonably healthy balance sheets, low corporate turnover, and little or no disclosed litigation. But ‘calm’ on the surface can cover up significant underlying structural, profitability, brand, or franchisor-franchisee relationship problems. It is imperative for prospective franchisees to speak to as many current and past franchisees as possible. Franchisees are the best possible source of information about a brand and what it’s really like to be a franchisee of that brand. Is the brand likely to grow in the long term? Would they do it all over again? Do they like working with corporate?
Since it can be hard to speak to every franchisee, any sensible franchise purchase process should also include reviewing franchisee surveys – ideally conducted by an outside third party such as Franchise Business Review. Surveys document the health of the franchisee-franchisor relationship across many touchpoints. Good surveys poll about brand strength, marketing execution, technology infrastructure and direction, trust in the corporate team, fees, value delivered, and other vital topics. This franchisee scorecard is the critical missing element that you will not find in the FDD.
Look closely at the report and really try to understand what’s captured. Use the information to ask questions when you speak to the franchisor team and franchisees. Find out how the management team uses the survey to improve. What feedback did they receive in the past, and what changed as a result? Are franchisee survey results baked into corporate compensation or performance evaluation? How do results compare to competitors?
If you have questions about the FDD, please schedule a call with me: https://calendly.com/scottmilas/introcall
Source: Franchise Business Review