Reading Between the Lines on an Financial Disclosure Document
A financial disclosure document (FDD) from a Canadian franchise is one of the most important documents you’ll see during your brand search. Before you invest your loonies, here are some tips to help you read a FDD like a pro.
Find out where the money is made
A franchise usually generates its income in two different ways: royalties and franchise fees. A royalty is an ongoing fee—a part of the profits from a franchisee—while the franchise fee is usually a one-time payment. How your franchise makes their money will carry different implications for you, depending on the industry.
Look at the new franchisee/total revenue ratio closely. If your franchise is in food or retail, seeing the franchisor make revenue mainly from royalties indicates profitability. This is a franchise that is selling product, and having royalties rolling in means that they do this well. However, if you’re seeing more money coming in from signing on new franchisees, it’s often a red flag.
Estimate the average per-location sales
You can figure out the per-location sales and use this information to strengthen your research if you have the FDD and it shows royalty rates. All you have to do is divide the total royalty revenue by the stated royalty rate as shown in the franchisor’s statements. Then, simply divide the sales system-wide by the unit count to get a rough idea of how much each location is making. Once you know what that figure is, you can pair it with your own assessment of franchisee performance to help decide whether this is the right opportunity for you.
Don’t skip those footnotes
Some very interesting details may be found right in the footnotes of the FDD. Some franchisors will go as hard as possible when it comes to maintaining a flattering public image, but they still may be obligated to disclose something less-than-flattering in the footnotes. You can find everything from information about pending lawsuits to details on the home office structure in this section of the disclosure. If you have any concerns about information that pops up in the footnotes, be sure to ask the franchisor about it. If there are any attempts by the franchisor to mislead you or ignore your questions, it’s time to move on and look for another opportunity.
When reviewed properly, an FDD can be a great window into a Canadian franchise system. Take the time to review yours in detail so you’re as informed as possible before you make such a significant decision.