Buy a Franchise
Prospective owners must look past headline numbers to understand the operational reality and financial potential of a franchise system.
At the start of a franchise search, the dream of business ownership is often pretty easy to identify. However, the reality — the real facts and numbers — can take a bit more effort to uncover. As a prospective buyer, you need to look beyond brand names and a few public franchisee testimonials. If the investment is meant to be just that, you have to look at the numbers. You want something steady and predictable. To ensure that’s what you’re getting, strip away the fluff and look for real evidence.
The most critical tool in doing this is Item 19 of the Franchise Disclosure Document. This is where franchisors provide financial performance representations … and if they don’t, that may be cause for concern in and of itself. Still, for franchisors that do have a clear Item 19, you’ll need to do some additional research. Seeing a few high numbers isn’t necessarily enough to reduce your personal risk. You need to understand how the numbers were calculated and identify any inconsistencies or outliers to get the full picture.
The average unit volume is often the “headline” figure investors focus on as it represents average annual sales of existing locations, providing real historical data. But not all AUVs are calculated the same way.
With AUV reporting, the franchisor should include some information about which units were considered in the calculation. Depending on the brand and model, this could be something like new, established, or mature locations; drive-thru, inline, or kiosk locations; or single-brand vs. co-branded locations. There should also be information regarding how many total units were included in the calculation; you can weigh this against the total existing unit count to understand how selective the franchisor was.
Most franchisors use data normalization to clean up their reporting, which is generally a good practice. Rick Mayo, CEO of Alloy Personal Training, explained that responsible “statistical hygiene” generally includes:
As a prospective buyer, these practices should not raise red flags. However, you should start asking questions when the franchisor seems to have crossed the line from statistical hygiene into selective reporting.
“The line gets blurry when brands begin excluding units because they’re ‘non-standard,’ ‘not following the model,’ or ‘underperforming,’” Mayo said. “As soon as a franchisor removes units simply because results are lower than average — or uses overly narrow criteria that conveniently leave weaker performers out — the AUV becomes less representative and more promotional.”
“The safest rule of thumb is this: If a reasonable candidate would expect a unit to be included, it probably should be. If it’s removed, the franchisor must clearly explain why,” he continued. “For Alloy, we focus on accuracy, consistency, and transparency. Our goal is to portray the system as it truly performs, not a selective slice of it.”
AUV reporting focuses on averages. This is helpful to get a wide view of what’s generally going on across the system, but the average can’t be the only number you look at.
In addition to the AUV, consider:
While franchises should, ideally, be operationally consistent, there are many variables that contribute to differences in financial performance. If there is a single exceptional location, especially in a smaller data set, the AUV reporting can be skewed. Considering the median alongside the AUV will provide a more realistic picture.
Outliers exist in every franchise, but extreme highs and lows should be treated as data points, “not crystal balls,” Mayo said.
A very high performer may reflect exceptional execution, a legacy location in a prime market or years of operational refinement. Conversely, a very low performer could reflect unique local circumstances or an exceptional lack of adherence to the system.
“A high-performing outlier is not proof that every location can or will perform at that level,” Mayo said. “It’s evidence that the model has potential under certain conditions… but not a guarantee. Similarly, a very low outlier is not necessarily predictive of system performance, but it is worth understanding. The productive question is: ‘What behaviors, conditions, and decisions correlate with the bulk of successful operators, not just the top 1%?’”
While an understanding of the outliers is beneficial, it’s important to remember that they are still outliers.
“Look for consistency, not just peaks,” Mayo said. “A strong franchise system is defined by how reliably it produces solid operators — not just a few home runs.”
While the FDD presents valuable information, the data is ultimately just numbers on a page, and you have to understand what the numbers mean in practice.
One of the most dangerous mistakes a buyer can make is assuming AUV is a direct reflection of what they will take home. In the FDD, AUV typically reflects gross revenue, not net profit. For any system you’re looking at, it’s critical to understand what net profit may look like after expenses like rent, labor, marketing and royalties are considered.
“No franchisor can publish net profit unless it meets strict regulatory requirements, and many do not,” Mayo said.
If net profit information is not included in the FDD, Mayo recommends a few key steps:
“At Alloy, we emphasize that royalty structure, labor strategy, occupancy costs, and pricing model all influence net results — and prospective owners should model these carefully before making an investment decision,” Mayo said.
People don’t buy franchises as passion projects; they’re businesses meant to make money. However, because there are so many factors associated with a franchise’s success, the investment decision needs to be backed by well-rounded research.
Read the FDD. Consult your financial advisor. Consider general financial trends within the franchise system. But look at the bigger picture, too.
“Focus on fit,” Mayo said. “The best-performing franchisees typically follow the model, execute consistently, and embrace the brand’s culture — not just chase revenue.”
For more information and guidance on buying a franchise, check out these related stories on 1851 Franchise:
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