Franchise Financials Not So Easy To Read | Tricky ITEM 19s Disclosed
Discover the essentials of franchise investing! Learn how to interpret the Franchise Disclosure Document (FDD) and unlock key insights from Item 19’s financial data, helping you make confident and informed investment decisions.
Table of Contents:
Introduction
Franchising has become an increasingly popular way for entrepreneurs to start their own business, without having to build a brand from scratch. By purchasing a franchise, individuals can take advantage of an established business model, operational support, and marketing strategies, among other benefits. However, before investing in a franchise, it is essential to conduct due diligence and carefully review the financials (FDD) provided by the franchisor. These documents can be complex and difficult to interpret, making it challenging for prospective franchisees to determine whether the investment is worthwhile.
What Is an FDD?
One of the key documents that franchisors must provide to prospective franchisees is the Franchise Disclosure Document (FDD). This document is designed to provide comprehensive information about the franchise system, including the franchisor’s history, operations, and financial performance. However, even with this information, prospective franchisees may struggle to understand the franchise’s financials, which can be challenging to read and interpret.
In particular, Item 19 of the FDD is often a point of confusion for prospective franchisees. Item 19 is designed to provide financial performance representations, which may include information on revenue, expenses, profits, and other financial metrics. While franchisors are not required to provide this information, if they do, they must follow specific guidelines regarding how the data is presented.
Item 19 of The FDD
The complexity of Item 19 stems from the fact that franchisors have a lot of flexibility in how they present their financial performance data. For example, they may use different accounting methods or exclude certain expenses from their calculations, making it difficult for prospective franchisees to compare the financials of different franchises. Additionally, franchisors may use vague language or provide incomplete data, making it challenging for prospective franchisees to get a clear picture of the franchise’s financial performance.
Another challenge when reviewing franchise financials is the amount of data provided. FDDs can be hundreds of pages long, and prospective franchisees may not have the financial expertise to review all the information thoroughly. As a result, they may overlook crucial details or fail to understand the implications of the financial data provided.
Given these challenges, it is crucial for prospective franchisees to seek the assistance of professionals, such as accountants or franchise attorneys, when reviewing franchise financials. These professionals can help prospective franchisees understand the data provided, identify any red flags or concerns, and determine whether the franchise is a worthwhile investment.
What Does FDD Stand For?
In conclusion, while franchising can be an excellent way to start a business, reviewing franchise financials can be a challenging and complex process. Prospective franchisees must carefully review the FDD, paying particular attention to Item 19, and seek the assistance of professionals when necessary. With careful due diligence, prospective franchisees can make an informed decision and choose a franchise that meets their financial goals and expectations
1. Expedia Cruises
| Quarter | Months |
|---|---|
| First Quarter | February 1st to April 30 |
| Second Quarter | May 1st to October 31 |
| Third Quarter | August 1st to October 31 |
| Fourth Quarter | November 1st to January 31 |
It is not uncommon for franchisors to exclude certain reporting periods from their financial performance representations, as is the case with Expedia Cruises. In this instance, Expedia Cruises did not include the quarterly period of February 1 to April 30, 2021, as a reporting period in their financials. The reason for this exclusion is due to a transition that occurred in February 2021, which resulted in the period not including only dedicated operations under the Expedia Cruises brand.
While the exclusion of a reporting period may not necessarily be cause for concern, it is crucial for prospective franchisees to understand why a particular reporting period was excluded and how it may affect their analysis of the franchise’s financial performance. In this case, it is important to note that the excluded period was relatively short, covering only three months, and may not significantly impact the franchise’s overall financial performance.
However, this exclusion highlights the importance of carefully reviewing franchise financials, particularly when it comes to Item 19. Prospective franchisees must pay close attention to the reporting periods included in the financials, understand the
2. Travelcenters of America
| Diesel Fuel | Gasoline | |
|---|---|---|
| Average | 8,725,259 | 1,183,840 |
| Median | 8,048,342 | 1,040,132 |
| High | 31,184,706 | 3,347,438 |
| Low | 2,980,116 | 183,226 |
| Number and Percentage of Company Centers that Met or Exceed Average | 58 / 43% | 58 / 43% |
| Number of Company Centers | 135 | |
| Diesel Fuel | Gasoline | |
|---|---|---|
| Average | 10,907,287 | 8,542,227 |
| Median | 8,389,893 | 8,037,884 |
| High | 39,994,171 | 23,200,199 |
| Low | 3,373,374 | 3,157,894 |
| Number and Percentage of Company Centers that Met or Exceed Average | 4 / 33% | 59 / 44% |
| Number of Company Centers | 12 | 135 |
When reviewing the financials of TravelCenters of America, it may be noted that while an average of non-fuel sales is provided, an average of fuel sales is not included in their financial performance representations. However, there is a solution to calculate an estimated average of fuel sales, using the median gallon amounts.
According to the provided information, the solution to calculate an estimated average of fuel sales is 0.02 per gallon using the median gallon amounts. To incorporate this number into the median sales average figure, one would need to multiply the median gallon amount by 0.02, and then add that number to the median non-fuel sales figure.
For example, if the median non-fuel sales figure is $10,000, and the median gallon amount is 100,000 gallons, the calculation would be as follows:
0.02 x 100,000 = 2,000
10,000 + 2,000 = 12,000
Therefore, the estimated median sales average figure, including fuel sales, would be $12,000.
It is important to note that this estimated figure is based on the provided solution of 0.02 per gallon using the median gallon amounts. While this may provide a rough estimate of fuel sales, it is not an exact figure and may not accurately reflect the franchise’s financial performance.
3. Frenchies
Studio 2016-1
| Month | Gross Revenue - Total | Service | Product | Membership | Gift Card |
|---|---|---|---|---|---|
| January 2021 | $26,222.41 | $19,018.60 | $1,184.81 | $5,272.00 | $747.00 |
| February 2021 | $29,049.38 | $20,881.83 | $1,346.55 | $5,444.00 | $1,377.00 |
| March 2021 | $32,246.16 | $24,034.72 | $1,659.44 | $5,592.00 | $960.00 |
| April 2021 | $33,230.90 | $23,656.60 | $1,358.30 | $6,198.00 | $2,018.00 |
| May 2021 | $44,289.39 | $31,863.05 | $1,571.35 | $6,524.00 | $4,331.00 |
| June 2021 | $33,472.26 | $23,249.37 | $1,172.90 | $6,958.00 | $2,092.00 |
| July 2021 | $30,213.43 | $20,692.62 | $782.80 | $7,000 | $1,738.00 |
| August 2021 | $30,384.95 | $21,779.61 | $1,182.34 | $6,548.00 | $875.00 |
| September 2021 | $33,606.02 | $22,928.06 | $1,912.95 | $7,200 | $1,565.00 |
| October 2021 | $35,134.84 | $25,377.00 | $1,394.84 | $7,978.00 | $385.00 |
| November 2021 | $36,623.23 | $16,250.38 | $1,304.85 | $7,978.00 | $10,830.00 |
| December 2021 | $33,921.46 | $12,532.56 | $5,452.67 | $8,202.00 | $7,734.23 |
Studio 2016-2
| Month | Gross Revenue - Total | Service | Product | Membership | Gift Card |
|---|---|---|---|---|---|
| January 2021 | $19,074.91 | $11,063.61 | $1,161.31 | $6,227.00 | $623.00 |
| February 2021 | $18,697.63 | $10,234.48 | $686.15 | $5,946.00 | $1,831.00 |
| March 2021 | $19,787.43 | $12,125.20 | $535.23 | $5,974.00 | $1,153.00 |
| April 2021 | $20,051.31 | $11,415.25 | $909.06 | $6,072.00 | $1,655.00 |
| May 2021 | $20,175.23 | $10,285.84 | $472.39 | $5,244.00 | $4,173.00 |
| June 2021 | $27,032.04 | $19,035.72 | $591.32 | $4,842.00 | $2,563.00 |
| July 2021 | $36,521.56 | $29,297.66 | $872.90 | $5,118.00 | $1,233.00 |
| August 2021 | $35,766.91 | $28,273.99 | $668.92 | $5,494.00 | $1,330.00 |
| September 2021 | $20,986.38 | $14,042.19 | $429.19 | $5,255.00 | $1,260.00 |
| October 2021 | $19,578.70 | $12,880.32 | $705.537 | $4,768.00 | $1,225.00 |
| November 2021 | $23,856.01 | $13,546.87 | $1,162.11 | $5,120.00 | $4,027.03 |
| December 2021 | $30,360.15 | $13,538.99 | $2,813.96 | $5,469.50 | $8,537.70 |
The FDD for Frenchies contains 22 tables, each representing an outlet, sorted by their opening year. Each table lists the monthly sales figures for that specific outlet. To obtain a clearer picture of the franchise’s recent performance and growth, concentrate on the outlets that opened in 2018 and 2019.
To calculate the average annual sales for the 2018 and 2019 openings, follow these steps:
1. Identify the tables corresponding to outlets opened in 2018 and 2019.
2. For each of these tables, sum up the monthly gross revenue figures to obtain the annual gross revenue.
3. Add the annual gross revenues for all the outlets opened in 2018 and 2019.
4. Divide the total sum by the number of outlets opened in 2018 and 2019 to get the average annual sales.
4. D-Bat
| Revenue Streams | Under 15,500 sq. ft. | Over 15,000 to 19,500 sq. ft. | Greater than 19,500 sq. ft. |
|---|---|---|---|
| Lessons | $180,183 High: $460,202 / Low: $66,175 No, that met or surpassed Avg: 10 Median: $133,652 | $252,953 High: $647,561 / Low: $93,961 No, that met or surpassed Avg: 10 Median: $198.194 | $298,714 High: $765,034 / Low: $71,350 No, that met or surpassed Avg: 10 Median: $263,913 |
| Cage Rentals | $66,416 High: $160,130 / Low: $19,142 No, thqt met or surpassed Avg: 10 Median: $61,781 | $91,412 High: $191,817 / Low: $38.244 No, thqt met or surpassed Avg: 10 Median: $86,701 | $126,864 High: $251,787 / Low: $26,056 No, thqt met or surpassed Avg: 10 Median: $126.840 |
| Camps/Clinics | $58,990 High: $191,817 / Low: $38.244 No, thqt met or surpassed Avg: 10 Median: $56,270 | $84,585 High: $191,817 / Low: $38.244 No, thqt met or surpassed Avg: 10 Median: $76,354 | $99,596 High: $191,817 / Low: $38.244 No, thqt met or surpassed Avg: 10 Median: $89,389 |
| Retail Pro Shop | $67,661 High: $191,817 / Low: $38.244 No, thqt met or surpassed Avg: 10 Median: $53,745 | $100,469 High: $191,817 / Low: $38.244 No, thqt met or surpassed Avg: 10 Median: $85,609 | $101,434 High: $191,817 / Low: $38.244 No, thqt met or surpassed Avg: 10 Median: $96,237 |
| Memberships | $106,958 High: $217,025 / Low $55,130 No. that Met or surpassed Avg: 11 Median: $102,785 | $149,246 High: $279,316 / Low $57,294 No. that Met or surpassed Avg: 11 Median: $151,262 | $181,928 High: $320,444 / Low $92,348 No. that Met or surpassed Avg: 11 Median: $202,476 |
| Credit Sales | $46,167 High: $103,849 / Low $3,470 No. that Met or surpassed Avg: 11 Median: $41,829 | $65,732 High: $144,054 / Low $20,890 No. that Met or surpassed Avg: 11 Median: $69.996 | $71,336 High: $187,462 / Low $6,246 No. that Met or surpassed Avg: 11 Median: $71.595 |
| Other | $18,759 High: $62.639 / Low $427 No. that Met or surpassed Avg: 11 Median: $16,813 | $23,891 High: $85.761 / Low $1,246 No. that Met or surpassed Avg: 11 Median: $20,203 | $79,445 High: $681.115 / Low $2,669 No. that Met or surpassed Avg: 11 Median: $20,203 |
The D-BAT FDD presents its financial data with a table divided into revenue streams for columns and the number of facilities. To calculate the AUV for the franchise, one should follow these steps:
1. For each revenue stream column, sum up the revenue generated by all facilities.
2. Multiply the total revenue for each column by the number of facilities in that column.
3. Add up the results from step 2 for all revenue stream columns.
4. Divide the total sum by the total number of facilities to get the Average Unit Volume (AUV).
Summary
In conclusion, the financials of a franchise are a critical aspect of the decision-making process for potential franchisees. While franchising can offer an attractive business model and support, it is essential to understand that the Franchise Disclosure Document (FDD) and, specifically, Item 19 can be complex and challenging to interpret. This complexity often arises from the flexibility that franchisors have in presenting their financial performance data, which can lead to variations in accounting methods or incomplete data.
Franchise systems like Expedia Cruises, TravelCenters of America, Frenchies, and D-BAT provide examples of how Item 19 can vary and the importance of understanding the financial performance of each franchise. Prospective franchisees must diligently review the FDD and seek professional assistance to ensure they make an informed decision.
Understanding the financials of a franchise is crucial in determining if the investment aligns with an individual’s financial goals and expectations. By carefully reviewing the FDD, paying particular attention to Item 19, and seeking the assistance of professionals when needed, prospective franchisees can navigate the complexity of franchise financials and make the best decision for their future.
