Recently I reviewed a franchise offering for a prospective franchisee. This particular franchise made financial performance representations in Item 19 of the Franchise Disclosure Document (FDD). The financial performance representations revealed some impressive numbers at first glance. After all, the highest performing franchisee was earning in excess of million dollars per year. And the “average” franchisee revenue was nearly $700,000 per year. The problem? Only three franchisees in the system were earning the average revenue or greater. The rest of the franchisees were below the average revenue amount and the lowest had revenue of just over $100,000. The disparity between the franchisee earning the most and the franchisee earning the least was over $1 million per year. It was clear the top performing franchisees were propping up the revenue figures for the franchise system.

I much prefer franchises that deliver consistent success. While all franchise systems will generally have high performers and low performers, consistency of financial performance across all franchisees is a major factor in determining whether a new franchisee will have success. All too often I review franchise systems where far MORE than 50% of the franchisees are BELOW the average sales in the franchise. This means a small number of high performers skew the results and make the franchise system appear more successful. I know everyone wants to believe they are the best. But for purposes of reviewing FDD financial information, I suggest you concentrate on the averages. And not just average revenue itself. If the information is available in Item 19, concentrate on the number of franchisees that are hitting the average revenue. A low number of franchisees hitting the average is indicative of a franchise that is not delivering consistent results to franchisees.

The best franchises will deliver consistent results across the board. If you want to own your own business and dream big, I say more power to you. But don’t let those dreams color your expectations. Franchise businesses do fail. Profits are not guaranteed. Set yourself up for a better chance of success by choosing a franchise that is a consistent winner.

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Rush Nigut is a shareholder with the Brick Gentry Law Firm in West Des Moines, Iowa. His practice includes both transactional and litigation matters including franchising and business law. Rush started his legal blog, Rush on Business, in 2006. He has been quoted…

Rush Nigut is a shareholder with the Brick Gentry Law Firm in West Des Moines, Iowa. His practice includes both transactional and litigation matters including franchising and business law. Rush started his legal blog, Rush on Business, in 2006. He has been quoted or referenced by hundreds of other blogs, websites, and publications. He also is the editor of the Brick Gentry Trial Team blog and can help you identify the most qualified lawyer at Brick Gentry to handle your case. Our lawyers have a breadth of trial experience in personal injury, employment discrimination, business litigation, IP law, and class action cases.