Determine Profitability

Get To Know Your UFOC

So do you fly blind into a franchise investment and simply hope for the best? Hardly. Information is available, but you need to do some work to find it.

The UFOC is your starting place. Item 20 provides you with the names and contact information of both existing franchisees and franchisees who have left the system in the past year. These are the folks in the trenches who can tell you how much they're making, whether the franchise system has been a good investment for them and whether they would make the investment today, knowing what they know now about the company. Former franchisees can give you insight as to why they left the system and whether they made a return on their investment. Call them. While they're not obligated to answer your questions or might be too busy running their business to spend any length of time with you, they have the most direct and relevant information available.

The UFOC has other "hidden" resources that, when combined with other research, can provide you with insight to profitability. Look at the company's audited financial information, for instance, and the accompanying notes for information on company-owned unit performance. Check out Items 5 and 6 (the sections that discuss fees) to see whether the fees are based on a particular performance formula. Review Item 7 (the initial investment)-especially the notes. Those notes often describe the size and type of locations required (which can give you an idea of how much rent you'll be paying), discuss staff sizes and organizational structure (which helps you estimate staff costs), and reveal how the company has determined working capital requirements. Item 7 may also cover inventory and inventory turns. When you couple this with the disclosures in Item 8 about required purchases, you'll begin to develop a fairly strong cost-of-goods model. A franchise consultant or accountant can guide you to a lot of information about the potential rewards or risks of a particular franchise opportunity via the data in its UFOC.

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