Buying for The Future: How to Project Growth in a Franchise

While there is no such thing as a crystal ball (from what we found in our research), franchising provides the closest thing in the form of a Franchise Development Document (FDD), an established operating model and a network of franchisees that can help in more accurately projecting growth.

“It’s much easier to plan your growth trajectory in a franchise than in an independent business. You already have a lot of info around projections based on what is in the FDD,” said Bill Bass, chairman and co-founder of Black Wolf Group, which owns and operates Two Men and a Truck and BrightStar Care franchises.

Item 19 in the FDD is one of the best starting points to determine what growth could look like as a franchisee. It contains financial performance information and information regarding unit performance.

“The FDD is standardized throughout the whole document; the Item 19, however, is purely unique for each franchise,” No Limit Agency* Chief Development Strategist Sean Fitzgerald said. “You’re no longer comparing apples-to-apples. The Item 19 is a great tool to gauge a brand’s track record and where it will be heading in the future.”

When reviewing the FDD, the Item 19 specifically, the Federal Trade Commission advices that you consider and ask more in-depth questions about the following:

• Is the Earnings Claim Typical for a Franchise in this System? – The claims could be deceptive if it doesn’t represent the typical earnings of franchisees.
• Average Income – The figures could make it look more successful than it is because a few select franchisees could be skewing the average.
• Gross Sales – If a certain location has high gross sales, it would be wise to look into what their expenses are to gauge how profitable they are.
• Net Profits – Franchisors won’t have franchisees’ net profits data so if they provide that info in the FDD, ask if it’s based on company-owned outlets.
• Geographic Relevance – When reviewing franchisee sales or income figures, be sure to ask if any of the supporting data came from franchisees in your area.
• Reliance on Earnings Claims - Franchisors may ask you to sign a statement — sometimes presented as a written interview or questionnaire — that asks whether you received any earnings or financial performance representations during the course of buying a franchise. If they told or gave you any information about how much your franchise may earn, report it fully on the questionnaire or other statement. If you don’t, you may be waiving any right to contest the earnings representations that were made to you and that you used to make your decision to buy.

While the FDD provides a lot of information, nothing can replace validation from other franchisees.  The franchisor has a standardized operating model that franchisees are expected to execute against so it allows for more of an apples-to-apples comparison when it comes to financial forecasts.

“With franchising, you can benchmark against people that are doing the exact same thing…. Two Men and a Truck has over 300 franchisees so it gives you tremendous benchmarks to establish success for your business,” said Bass.

Chad Tramuta, Smoothie King Franchise Development Manager, advices prospective franchisees to view a franchise opportunity as a long-term investment and to project the potential for growth accordingly.

“Franchising should never be seen as a flip or short-term business. Find a brand you believe in and want to be a part of for the long-term.”