Tuesday, March 11, 2014
By Rob Bond
As the publisher of four annual books on franchising and the manager of twelve websites that deal solely with franchising, I have long been fascinated with the increasingly favorable trend among franchisors to provide Financial Performance Representations (Item 19s) in their Franchise Disclosure Documents (FDDs). Realizing how difficult it is for the layman to secure this information, my firm has been publishing Item 19s for key franchisors in an annual publication “How Much Can I Make?” with 13 editions to date.
What is striking is the percentage of franchisors who now include an Item 19. During 2013, we analyzed 745 FDDs for franchisors big and small, and extracted 501 Item 19s, amounting to 67% of franchisors who now include this information. This compares with ~56% in 2012 and ~25% only five years ago. Although the precise underlying reasons for the marked rise in submission are unclear, it is fair to assume that there is an increasing disadvantage to those franchisors who do not include an Item 19. A secondary reason may be the fact that the economy has modestly improved, and previously reluctant franchisors are now “prouder” of their franchisees’ success than they were several years ago.
If you want to find the answer to the question “How Much Can I Make?” if you were to buy a specific franchise (or what your competitors’ franchisees made), all 501 of these Item 19s are now available for purchase on Item19s.com for $40 each. Industry packages are available at a greatly reduced cost per unit. All 501 Item 19s are available for $700 (or $1.40 each). It should be noted that roughly 39% of the Item 19s are red-lined, meaning that the previous year's Item 19 has been edited (strike-through) by the franchisor to reflect changes between years. This is for the benefit of the various state administrators who, theoretically, check the annual FDDs.
Going forward, the World Franchising Network will provide a sample Item 19 each week that we feel is exceptional in the level of detail and potential value to the prospective franchisee. To access the 2013 Item 19 for Anytime Fitness, please click here. If you would like more information about Anytime Fitness, please click here. Because of the information provided and the overall strength of the company, we feel that Anytime Fitness is worthy of your consideration as a prospective franchisee.
My sense is that franchisors are increasingly convinced that they have a competitive advantage in providing this critical information to prospective investors (versus a significant disadvantage by not doing so). From the demand side, franchisee lenders are increasingly insisting on knowing how their prospective client franchisees will repay a loan. Equally important is the ability of franchisors who provide an Item 19 (regardless of the level of detail) to minimize potential lawsuits from franchisees who say that they were promised by the franchisor’s staff (or brokers) that they could make a “fortune” if they bought a franchise. By providing this information, these largely frivolous lawsuits can be minimized.
Only time will tell whether Item 19 disclosures will continue to increase. I would speculate, however, that the governing bodies of the franchising community will eventually make the inclusion of an Item 19 mandatory. Given that most franchisees will be investing a significant portion of their net worth into a franchise, such a mandatory disclosure seems only fair. Notwithstanding the variables, I have always been incredulous at the thought of someone investing hundreds of thousands of dollars in a venture with no reliable sense of what they might earn if they followed the roadmap laid out by the franchisor.
If you are researching a company and seriously thinking about becoming a franchisee, it is incumbent upon you to exhaustively review the company’s FDD (order it at FranchiseDisclosures.com if the franchisor is unwilling to provide one) or, at an absolute minimum, review their Item 19 (Item19s.com). If the company doesn’t provide an Item 19, then order one (or more) from their closest competitors.
As always, do your homework.