As Aloha Poke CEO Chris Birkinshaw says, "It’s a really interesting time to be talking about FDDs."
That's quite an understatement, and as companies file this key franchise document, there are some big differences between 2021 and 2020 versions. In a word, the uneven documents reflect perfectly the uneven COVID-19 effects on the franchise space.
"COVID has been really uneven. I think across the board people are thinking about how do they present their franchise offering in light of the last year and to what degree that informs the future, so we're not alone in trying to sort this out," said Birkinshaw. "I think there will be far more franchisors that will not provide an Item 19 this year, not because a lack of transparency but because of how COVID affected the business."
Aloha Poke tweaked its own Item 19 compared to prior years, but it still gave a lot of information about the pandemic impact, the top and bottom performers and how it all compares to historic averages. He said the mantra at the business is to be as open as possible.
"What I see a lot are the Item 19s that feature the top 25. You think, 'Holy crap, that looks amazing!' But you have to look at the footnotes to glean if that’s the top 25, what is the bottom 15 doing?" said Birkinshaw. "And there's a lot of devils in the details in the footnotes. It's not uncommon in the fast-casual industry to carve out some amount for the general manager and say if you're going to be manager you have to think about hiring someone or pay yourself. We try to help the franchisee not do one more thing."
Aloha Poke's FDD breaks down the top restaurants earning $669,000 in gross sales on average, $665,000 in net sales. It also includes average cost of sales ($191,000) and gross profit of $474,729. That's down significantly from $869,000 in gross sales and $578,000 in gross profit, which the FDD explores in detail.
Birkinshaw said the Item 19 isn’t the only tricky spot: the massive investment ranges of Item 7, which states the projected investment to start up a franchise, can get pretty tricky, too.
"If I look at a range of Item 7, a range of $100,000 to $1 million, that's not necessarily prescriptive. We all know we can't guarantee or disclaim the statements we put in there, so there's a benefit of having a wide range there, but as a franchisee, it's how do I glean what my investment will be?" said Birkinshaw. "
Aloha Poke strives to get an exacting range, listing $140,900 to $363,800, but suggests prospects talk with existing franchisees about where the variances might be.
In some ways, the big ranges and rosy Item 19 numbers can help through the sales process. Entrepreneurs are a positive group, so they tend to look at the top 1 percent and the bottom of the investment scale while perusing an FDD and daydreaming about a concept. When operational reality hits, however, Birkinshaw said he likes to be on the same, accurate page. But does it hamper the sales process?
"It doesn't if your offering is good. There's certainly a portion of the FDD that is looked at by development execs as a marketing tool. You want to be accurate and keep you out of trouble, but you don’t want a relationship problem with franchisees down the line," said Birkinshaw. "Getting people excited and showing that this is a compelling business opportunity, there's an important balance here. But maybe we're just lucky to have numbers I don’t feel like we need to massage."
In some ways, he said it makes the sales process better. Prospects who don't like the real numbers can weed themselves out. For excited investors, it's a good first date in a long relationship.
"I feel confident that we're being good guys in franchising," said Birkinshaw. "That develops trust."