Pros and Cons of Having a Transparent FDD

Company transparency, including the franchising community, can help sell more overall units. A Franchise Disclosure Document (FDD) can be one of the most vital sources of information for prospective business owners looking to open a franchise. The FDD lays out relevant information to prospective franchisees looking to purchase units with a franchisor. This information includes details about the franchisor’s experience, the history of the brand and executives, the financial wherewithal needed to open a unit, the services that the franchisee can sell, and examples of the performance of existing units (Item 19). Franchisors are required to send prospective franchisees their FDD 14 days before they are asked to sign any contract. The most important information for the prospective buyer is Item 19. According to Entrepreneur.com, “only 30 – 40 percent of franchisors provide information on how much their current franchisees are earning; the others must state that they choose not to make such a claim.” Also, franchisors are not required to list all units in their franchise system. The Goddard Systems, Inc., a childcare franchise with roughly 400 units continuing to see national expansion, believes transparency with their FDD can be the differentiator between signing a successful business owner and one who might fail. Jeff Travitz, Director of Franchise Sales for The Goddard Systems, said “the reason is to give a clear understanding of what the franchise opportunity is. [The FDD] compares how much money they want to make with how much money they can make. The Goddard School provides a clear message of how much they can make, gross revenues, how much rent can cost, how much payroll can cost, and shows these numbers with every unit.” Would transparency be as effective with a smaller business or recent start-up? Showing total earnings claims for every unit can sometimes be detrimental to a brand’s image (hence the 30-40 percent). What if you are a small start-up and some of your franchisees have not been performing up to standards? It might not be the best option for the franchisor to show all the units’ gross sales. Transparency allows The Goddard Systems to weed out prospective franchisees that might not fit their concept. Showing all units on the FDD “scares away people that should be scared away,” said Travitz. “We show different charts of the first 12 month averages and the under 18 month averages. This helps to filter out the unwanted business owners and ensures that The Goddard School units are run by good business owners.” “Those interested in The Goddard School are very informed buyers… The ones that know about franchising are shocked that we publish this information. People looking at other franchise systems are very positive about our transparency… This also allows prospective franchisees to bring the FDD to their accountant or advisor to plan accordingly.” While transparency can be a strong sales tactic, there is no black and white answer to the question. Each company has to take their overall image into account when looking to weigh the advantages versus disadvantages of being a transparent company. Instead, the answer to the question of ‘should my company be transparent?’ is grey and should be taken on a case-by-case situation. What works for one concept or business might not always work for another.