By Tim Kilham, Lanyon Partners
Before you commit to buying a franchise, the franchisor must give you a disclosure document. The disclosure document may or may not contain earnings information for potential franchisees.
The franchisor may choose not to provide earnings information, in which case the disclosure document must specifically state that earnings may vary between franchises and the franchisor cannot estimate earnings for a particular franchise.
If the franchisor does provide earnings information, the Franchising Code of Conduct requires that that information must be based on reasonable grounds. Further, where the earnings information is a projection or forecast (rather than actual results of franchisees) then the franchisor must inform you of
- the facts and assumptions on which the forecasts are based
- the extent of enquiries and research undertaken
- whether the forecast includes depreciation, salary for the franchisee and the cost of servicing loans
- assumptions about interest and tax.
If there are existing franchisees, and the franchisor chooses not to provide actual franchisee results, or any earnings information, then you should ask the franchisor why this is the case. Is it because the franchisor has something to hide, or is there a good reason for not revealing specific franchisee results or any earnings information at all? Some franchisors refuse to provide information for fear of it being used in litigation against them in the event of a dispute. That is the franchisors’ right, but it is also your right to refuse to part with your hard-earned money if you are not provided with sufficient information to adequately assess the franchise opportunity.
If there are existing franchisees then you should talk to as many of those franchisees as possible. The questions you ask should be both financial and non- financial questions. Not every franchisee will want to talk to you, and different franchisees will disclose different levels of information, but talk to enough franchisees and you should get an informed picture of franchisee results and be able to get enough information to put together your own projections.
If the franchisor does provide information about actual franchisee results then you should establish which franchisees’ results are being provided to you. Are the results an average of all franchisees? Are they just results of selected high performing franchisees? If you are going to base your forecasts on the results of other franchisees you should try to make sure you are looking at results for similar franchisees, whether in terms of location, demographics, turnover or other factors.
It was mentioned above that where projections are provided the franchisor must explain whether or how depreciation, salary, interest, tax, etc. are taken into account. You should also consider how these items are dealt with when looking at the results of existing franchisees. Some franchisees pay themselves salaries, some don’t. Some franchisees have borrowings others don’t. Some franchisees buy assets outright, others lease the assets. Different franchisee business structures result in different tax outcomes. It is therefore important that if you are provided with forecasts or with actual franchisee results you scrutinise those results carefully to determine how relevant they are to you.
Ultimately all intending franchisees should prepare their own projections and use those projections as a basis for deciding whether to purchase the franchise, and if so, how much to pay for the franchise. The information provided by a franchisor, whether projections or actual results, should be used only as a guide to producing your own projections
About the author
Tim is a director of Lanyon Partners Chartered Accountants and heads up their franchising division. Tim has provided advice to, and acted for, many franchisees and franchisors, and is particularly active in advising on the purchase and set up of franchise businesses.
Contact Tim at
Phone 03 98616140
Email: [email protected]