Responsible Disclosure: Make your FDD a More Powerful Selling Tool

Franchisors constantly strive to attract more franchisees who are similar to their top-performing operators. To achieve this, they must take the time and effort needed to pull together the information they can use to build a franchise development program that attracts interest, and then recruit the top candidates to sign with their concept.

Candidates today are seeking franchise opportunities that meet their financial goals and increasingly view franchising as an investment vehicle. Today’s candidates want more information sooner in the process if they are going to proceed to investigate your brand. Franchisors need to get that information to them clearly and quickly through “responsible disclosure” in the FDD.

One of the main points of resistance to disclosing financial information about the company units, multi-unit, or franchisee groups through the FDD is that will it become public knowledge. Most sophisticated multi-unit candidates will eventually ask for this information to make their decision anyway, so why not give it to them earlier in the process? Take the time and effort to develop a meaningful Item 19 FPR that franchise investors can extract vital information from—and that continues their interest in pursuing an operating investment with your brand.

Item 19 has evolved tremendously over the past decade. In 2000, fewer than 10 percent of franchisors published an Item 19, and it was generally only a gross sales disclosure about the system. As franchisors began working with broker networks, many (in some cases almost 90 percent!) provided some level of Item 19 disclosure.

Franchisors working closely with their law firms are becoming very creative at working within the FTC regulations to create some amazing disclosure. Most franchisors active in broker networks were the early adopters and over the years have only improved and refined their disclosure of important financial information. Franchisors with an Item 19 disclosure have become the franchise concepts of choice, especially for multi-unit operators.

Today, more and more franchisors are disclosing detailed information about the franchise units in their system. As more-qualified franchise buyers seek investments, they require more detailed information that is sometimes hard to obtain from the standard validation process of asking existing franchisees for information.

Implementing a process and an information system that allows candidates to easily understand the financial operation of your system is the key to attracting the right candidates. Later, they can confirm their findings with existing franchisees during the qualification and validation process, making for a much smoother process.

Where to start?

First, by understanding the “ideal” mix of financial disclosure that will provide candidates with good information about your brand and portray it in the best possible light. You can craft your Item 19 in several different formats. Some companies have included graphs of different details of their business.

The next step is analyzing closely, and in different formats, what subsets of information can be helpful for candidates to research and understand your opportunity. Information to consider disclosing to candidates—and ways to slice-and-dice it for your different types of prospects—include ramp-up time to cash flow; single-unit owners; multi-unit owners (3 to 5, more than 5); regions of the country; square footage of stores; units most like what you sell today to new franchise partners; operating expenses and gross sales; average ticket; customer counts; industry statistics; and EBITDA.

As you can see, there are several options to help candidates understand how your business operates and how they have to plan their expansion with your brand. I strongly suggest you work with your law firm and consultant to take an objective look at this opportunity, and to ensure it can be backed up by facts and history so the disclosure is legal and accurate.

Assist your franchise development team with the opportunity of a “great” FDD to work with quality candidates considering joining your system.

Happy Selling,
Marc