Today I am going to talk to you about how the numbers tell the true story about the franchisor’s profitability. When you receive a copy of the Franchise Disclosure Document, you can get overwhelmed by it’s length. In order to help you, I will identify a few simple tactics to analyze the franchisor’s corporate financials.
- When you receive the FDD, instead of starting with Item 1, I recommend that you begin reviewing the Audited Corporate Financials first, which is in a separate exhibit of this document.
- In this first step, you will want to start with a review of the Balance Statement. You will need to analyze the total assets to total liabilities and determine the owner’s equity. Is it improving, staying the same or declining in value?
- The next step is to review the Income Statements for the last 3 years. We analyze all revenues, which include royalty payments and all other income, and then compare these figures to the total expenses. We determine how the gross and net margins are trending over the last years? Have they improved, stayed the same or declined?
- Finally, we evaluate the cash equivalents for the last 3 years. What are the cash reserves at the beginning of year compared to the end of the year? Are they stronger than last year and the year before or are the numbers deteriorating.
- If the numbers are declining, we will need to ask the franchisor to explain “why” and then determine how to proceed with the document review.
- If you start with analyzing the financial statements first, you can confirm very early in the process, how you want to proceed, which will save you a lot of time.
- Don’t overlook this important information. These numbers are very important to analyze the viability of the franchise system. So take your time and ask questions.