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Good News: ‘Zors Providing Better Financial Info


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Like any investment, franchising is a gamble for those considering putting their money on the line. To that end, we encourage all players in the industry to disclose as much financial information as possible. A new report by FRANdata suggests franchisors are getting the hint. 

According to FRANdata’s report, U.S. franchise brands are increasingly providing financial performance data to prospective investors and lenders. It’s a move the International Franchise Association says is helping create more transparency for prospective ‘zees, as well as greater access to capital from lenders.

The report shows franchise companies are increasingly seeing the value of disclosing certain financial information to prospective investors and lenders under “Item 19” in their Franchise Disclosure Documents, without the regulatory requirement to do so.

“IFA believes due diligence by prospective franchise owners creates better-performing franchisees and healthier franchise systems. The current regulatory framework that encourages voluntary financial performance disclosures rather than requiring them allows franchisors to decide which information is most helpful to potential investors and lenders. As a result, market forces have led to more disclosures and greater transparency, once again demonstrating the wisdom of the Federal Trade Commission’s most-recent update to the Franchise Rule,” said IFA President & CEO Robert Cresanti. “Since the adoption of the Federal Trade Commission’s Franchise Rule in 1979, and subsequent revisions, IFA has been a strong proponent of voluntary disclosure.”

The report examined the importance of financial performance representations to the two groups who are key to franchise system growth: prospective franchisees and lenders. It also examined patterns of transparency in financial performance representations over time. Key results from the report show the following trends:

In 2016, 66 percent of franchisors include financial performance representations in the franchise disclosure documents; this is up from 52 percent in 2014.

More than 92 percent of franchisees say that this information helped them understand the opportunity, perform due diligence, and write their business plan.

Forty-seven percent of franchisors disclose operating expenses, and 24 percent provide information about profitability, including operating income, earnings before income, taxes, depreciation, and amortization (EBITDA), gross profit, or net income.

Ninety-seven percent of lenders say they are more likely to make a loan deal for a franchise brand that provides financial performance information in an item 19.

“When properly disclosed and responsibly interpreted, this information helps franchisees make better investment decisions, lenders make better loan decisions, and franchisors understand and improve their operations. Most importantly, it strengthens the franchise business model overall by allowing performance to be measured, something that simply can’t be done in a comparable way with independent businesses,” said FRANdata CEO Darrell Johnson.

FRANdata’s research was based on a combination of in-house proprietary data analysis, a survey of franchisees, and a survey of franchise lenders. FRANdata examined more than 3,000 franchise brands over the three-year period since 2014 to assess trends in franchisor disclosure of system financial performance representations, looking both at the rate of disclosure, as well as quality of the information provided.

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The latest news, opinions and commentary on what's happening in the franchise arena that could affect your business.

Tom KaiserTom Kaiser is associate editor of Franchise Times. He can be reached at 612.767.3209, or send story ideas to tkaiser@franchisetimes.com.
 
Beth EwenBeth Ewen is editor-in-chief of Franchise Times. She can be reached at 612.767.3212, or send story ideas to bewen@franchisetimes.com.
 
Nicholas UptonNicholas Upton is staff writer at Franchise Times. He can be reached at 612.767.3226, or send story ideas to nupton@franchisetimes.com.
 
Mary Jo LarsonLaura Michaels is managing editor of Franchise Times. She can be reached at 612.767.3210, or send story ideas to lmichaels@franchisetimes.com.
 
Mary Jo LarsonMary Jo Larson is the publisher of Franchise Times Magazine and the Restaurant Finance Monitor.  You can find her on Twitter at
 twitter.com/mlarson1011.
 
Nancy WeingartnerNancy Weingartner is editor-at-large of Franchise Times magazine and the editor of the Food On Demand media project. You can reach her at 612-767-3200 or at nancyw@franchisetimes.com.
Follow her on Twitter at http://twitter.com/nanweingartner.
 

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