Published January 16, 2014
It’s hard for me to believe there are still franchise brands that don’t include an Item 19 in their FDD. There are even CEOs that don’t know what an Item 19 is. Technically, an Item 19 is optional, but for good franchise systems looking for GREAT franchisees, it’s really not. I mean, wouldn’t any savvy investor want an answer to the question, “What can I expect to make?’
If you don’t already have an Item 19, adding one to your FDD should be priority #1 for 2014. And, if you do include one, auditing it should be on your to-do list. Does yours accurately tell your franchisees’ financial story? Should it be updated? What are your competitors showing that you’re not?
You may be able to come up with lots of excuses not to add an Item 19 (“our system is too complex, “our franchisees are too different,” “it won’t accurately convey what a candidate can expect to make”), but the reality is your competitors include it and so should you.
Here are some fundamentals as you tackle this goal:
The more, the better: To some degree, it’s up to you how much info you include in your FDD, but many of the CEOs I’ve talked with have really beefed up their FDDs in the past couple of years to ensure that candidates really know what they’re getting into when they buy a franchise. Jim Carpenter of Wild Birds Unlimited told me his company spent two years looking at franchisee financial information in order to include a franchisee adjusted net operating income in Wild Birds’ FDD. Even if you already have an Item 19, you may want to go back and consider adding more information to it. More is truly better in terms of what you can offer to a prospective franchisee on the front end to ensure their success on the back end.
Tell your story—the true story: The purpose of your Item 19 should be to educate prospective franchisees about what they can expect as an operator. It should NOT be to sell franchises. You might be tempted to paint the picture a little rosier or to include only information that tells a best-case scenario, but in today’s business climate, full disclosure is always better. In the long run, you want franchisees who make you money, which means you want franchisees who knew what they were really getting into from the start.
Involve the right legal help: One franchisor told me that he’d been reluctant to add an Item 19 to his FDD because his legal team advised against. My first thought? Get a new legal team. Maybe not for all your legal needs, but for this—adding the FDD—you need a lawyer with Item 19 expertise. Ask around (or ask us) for some names of lawyers others have worked with.
Just do it: When it comes to including an Item 19 in your FDD, the “Do We or Don’t We” debate can go on and on, but the reality is, it’s no longer a choice. Prospective franchisees want it, your competitors are more than likely providing it, and in today’s “transparency is king” world, an FDD without an Item 19 is a big red flag. You open yourself to all sorts of questions by not having one, so it’s better to just include it.