Analysing Franchise Financial Information

In one of previous post, Robert Kiyosaki explained why he uses the franchising business model to grow his business.

If you are interested to start your own business, instead of starting everything from scratch, becoming a franchisee is one of the best way to jumpstart your own business.

When you are presented with a franchise opportunity, request for a copy of the franchisor’s Uniform Offering Circular (UFOC), which contains financial and material information about the franchisor.  The Federal Trade Commission (FTC) mandates that franchisors provide a financial disclosure document to all prospective franchisees prior to signing the Franchise Agreement.  This document is an integral part in the franchise selection process, as it discloses everything material about the company, both good and bad.

It is a highly recommended that you seek assistance when reviewing financial information, such as from an accountant, especially when you have limited financial knowledge in this area.  Hiring an accountant to review the UFOC and financial statements may cost anywhere from a few hundred to several thousand dollars, but if you compare this cost to the overall financial investment you are preparing to make, it may pay off if they uncover negative information.  A franchise attorney can look for potential clauses that could lead to problems.

Whether or not you seek help with reviewing the UFOC, there are several things you can do to verify the information contained in the document and uncover potential red flags. Substantiating financial statements is important, as the government does not review UFOCs to ensure their accuracy, they only require that franchisors provide it to prospective franchisees.

Franchisors may or make not make straight-forward earnings claims (most often they do not) but will supply information from which you can calculate gross sales. A good way to substantiate earnings claims is to contact existing franchisees and find out their earnings.

Some things to consider when reviewing the UFOC include whether it reveals any unusual risks taken by the franchisor and if they have a questionably high litigation record, how its franchise outlets are performing, and how well the company’s intellectual rights are protected.  If they are not properly protected other businesses could use the same name or logos and open up shop in your area, possibly taking away your business and profiting from the name recognition you paid to use.