Franchisors Providing Financial Disclosure at Highest Rate Ever

Multi-unit franchisees and other investors now have access to more franchise brand performance data than ever before, according to a new report from FRANdata, conducted for the Franchise Education and Research Foundation. The information provided by brands offers greater transparency to prospective and existing franchisees as well as greater access to capital from lenders.

Franchisors understand the value of disclosing certain financial information to prospective investors and lenders under “Item 19” in their Franchise Disclosure Documents (FDDs), without the regulatory requirement to do so.

The report examined the importance of financial performance representations to the two groups who are key to franchise system growth: prospective franchisees and lenders. It also examined patterns of transparency in financial performance representations over time. Key results from the report show the following trends:

• In 2016, 66% of franchisors included financial performance representations in the franchise disclosure documents; this is up from 52% in 2014.
• More than 92% of franchisees say that this information helped them understand the opportunity, perform due diligence, and write their business plan.
• Forty-seven percent (47%) of franchisors disclose operating expenses, and 24% provide information about profitability, including operating income, earnings before income, taxes, depreciation, and amortization (EBITDA), gross profit, or net income.
• 97% of lenders say they are more likely to make a loan deal for a franchise brand that provides financial performance information in an item 19.

“When properly disclosed and responsibly interpreted, this information helps franchisees make better investment decisions, lenders make better loan decisions, and franchisors understand and improve their operations. Most importantly, it strengthens the franchise business model overall by allowing performance to be measured, something that simply can’t be done in a comparable way with independent businesses,” said FRANdata CEO Darrell Johnson.

The research was based on a combination of in-house proprietary data analysis, a survey of franchisees, and a survey of franchise lenders. FRANdata examined over 3,000 franchise brands over the three-year period since 2014 to assess trends in franchisor disclosure of system financial performance representations, looking both at the rate of disclosure, as well as quality of the information provided.