Obtaining Financial Results From Franchises

It's smart to investigate the average financial returns on franchise investments. But how do you find the numbers?

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Q: Your advice regarding the wisdom of investigating the average return per unit over a three-year period seems solid (see " Franchise Investment vs. Return "). However, I have a question: How does one obtain these figures? Is it your opinion that most franchise operators will disclose this information? Can you recommend any other methods?

A: This is a great question that a number of people wanted more information about. If you're dealing with a franchisor that doesn't provide an earnings claim in the UFOC (which sounds like the case with you), then you're going to have to do a bit more digging. Knowing the best techniques for this research will make the process much more effective for you.

The best sources of information about actual financial results of operating units in a franchise system are the existing franchisees. You'll want to use these sources to confirm the accuracy and clarify the scope of information in a franchise, even if an earnings claim is published in the UFOC. The bottom line is, you can get this information from existing franchisees in most cases, but you've got to be smart about how you ask.

If the first question out of your mouth is, "How much money do you make?" you can expect an answer that is some variation of "none of your business." This is highly personal information, and they don't know you from a can of paint. For all they know, you could be a competitor.

Always start by asking questions about other subjects that you want to know about and spend some time building a rapport with the existing franchisee. Examples of these types of questions would include:

  • Training programs: How well does the franchisor set up and train a new franchisee to have initial and ongoing success in operations?
  • Opening support: How easy did the franchisor make the process of getting a new business ready to open?
  • Marketing programs: How effective were the franchisor's marketing programs in terms of creating initial and ongoing customer demand for the new business?
  • Purchasing power: How well does the franchisor take advantage of the buying power of the chain to save franchisees money in relation to ongoing supply purchases for the business?
  • Relationships: How well do the franchisees and the franchisor get along?
  • Total typical investment: What did it actually cost to get a unit up and going through to the point where it began to break even in terms of current operations? How did that number compare to the estimates in the UFOC?

Once these areas are covered, you will have built a relationship with the franchisee, and that will make it much easier when you approach questions about income. The secret here is to work into it somewhat gradually.

Start by asking franchisees for information about system-wide averages. For instance, what is their understanding concerning typical gross sales and the various categories and amounts of the expense items? Then work into a discussion about net results in relation to profit and, even more importantly, cash flow. Remember, you're asking about system-wide numbers.

Finally, ask how these numbers compare to their specific operation. Again, first sales, then expenses, then nets. You will find that, most of the time, they've actually given you their own numbers when you asked about system-wide results and they'll confirm this by stating that their numbers are just like the system-wide numbers that they already discussed with you. In any case, they'll usually give you at least a percentage variance factor that will let you easily extrapolate their numbers from the information you've already been discussing.

I think you'll find that this approach works most of the time. After making a number of calls in this manner, you should have a pretty clear idea of what's happening in relation to actual operating results in that franchise.

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