How Franchisees Can Evaluate Potential Gross Sales

As a prospective franchisee, there is only one place to look for a brand’s all-important financial performance numbers - Item 19 of the FDD. However, not all of the numerous facts and figures found in Item 19 tell the whole story of a franchisor’s success. That is why franchisees must look closely at context and the overall big picture of a brand’s financial disclosure, especially when it comes to evaluating gross sales.

“In Item 19, a franchisor will disclose average gross sales - what percentage of units fall above or below the average and the median gross sales,” said Charles N. Internicola, managing partner and founder of The Internicola Law* Firm, PC. “But just knowing gross sales is not going to be an indicator of future revenue.”

Internicola says that while it is important to know what kind of sales a franchise’s units are averaging, these numbers tell nothing on their own about potential profit.

“Gross sales certainly give some insight into how other financial details and expenses can fit in,” said Internicola. “But by itself it shouldn’t be relied on for prospective franchisees at all.”

Less commonly, franchisors will also include operating expenses and operating cash flow and, along with these numbers, gross sales can be a crucial piece of the decision-making puzzle. But Internicola warns that obsessing over the big-picture numbers is not the most important thing new franchisees should be focusing on.

“When you just start your franchise, you should be focused on things like marketing and customer acquisition, and not on macro numbers like gross sales,” said Internicola. “Concentrate first on acquisition and controlling expenses.”

When a franchisee first purchases a business and is getting things up and running, it is easy to think only in terms of sales, but Internicola sees something much more crucial happen among franchisees who end up successful.

“They need to be proactive and understand that they should be working every day toward making themselves an expert in whatever line of work they are in,” he said. “They take on an obligation to be responsible for handling marketing, managing [return on investment] ROI, and forging a partnership with their franchisor.”

And along those same lines, prospective franchisees should be looking for a franchisor partner that treats them the same way and not one trying to get by simply on flashy financial numbers.

Said Internicola, “It is far better to have a proactive partner that will nurture and help growth, rather than one just throwing out gross sales numbers and not focusing on unit-specific metrics.”