Franchisors share quite a bit of their financial data with you during discovery and in the official disclosure document. They also expect you to share financial information with them.
That might seem a big more personal than your looking into their financial data. After all, you’re considering buying from them and they’re usually not financing your purchase. Why should they be want all that personal data about you?
Actually, when you set out to invest in a franchise business opportunity, you’re applying to become a franchisee. It’s essential for the franchisor that you should be a good representative of their brand. It’s in their best interests for you to succeed, too.
Successful franchisees bring revenue to their franchisor. Unsuccessful ones may not even provide a good return on the investment the franchise makes in them. The initial franchise fee may not actually cover the full value of what you receive from a franchisor. Not only are they providing you with a system that works and the right to use their name, they’re also providing a lot of things that an independent business would have to pay for up front.
Some of the things franchises may provide for their new franchisees:
- legal support
- negotiation with landlords or vendors
- marketing materials
- initial inventory
- tools and equipment
- operating documents, including legal documents such as HR forms and client contracts
- network contacts, special pricing, etc.
Add up the products and services that a franchisor puts into preparing a new franchisee, and you can see that they’re making an investment just as you are.
While franchises are less likely to fail than independent start-ups, they can fail. One of the main reasons for failure in all businesses is undercapitalization. It takes time for a business to become profitable, and there are plenty of up-front costs, in addition to daily operating costs while the company is getting on its feet.
There are also slow times in any business. These may be seasonal, they may be in reaction to macro events like weather, changes in the price of fuel, or even political events that affect consumer confidence.
Many new companies cut corners on marketing when they feel a financial pinch, and franchisors know that this will affect the long-term success of your franchise. Certainly, cutting corners on the quality of goods and services or delaying payments to vendors can result in negative consequences for your franchise and for the reputation of the brand as a whole.
Franchisors look at the background and experience of prospective franchisees, but they also need to be sure that you can support the franchise through lean times. A franchise that doesn’t have enough financial stability to keep the doors open through the early months or during slow times can damage the franchise and provide a poor return on investment.
So be mentally prepared to give franchisors access to your financial information, and take some time to get your financial affairs in order as you research franchise opportunities. That way your financial life can be an open book.