An upswing of information disclosed by U.S. brands to prospective investors is making such brands a more attractive propositions for would-be franchsises and master franchisees, according to a new report from FRANdata. Although regulations do not oblige them to do so, brands are increasingly seeing the value of disclosing certain financial details under ‘Item 19’.
IFA President & CEO Robert Cresanti said, “IFA believes due diligence by prospective franchise owners creates better-performing franchisees and healthier franchise systems. The current regulatory framework that encourages voluntary financial performance disclosures rather than requiring them allows franchisors to decide which information is most helpful to potential investors and lenders.
As a result, market forces have led to more disclosures and greater transparency, once again demonstrating the wisdom of the Federal Trade Commission’s most-recent update to the Franchise Rule. Since the adoption of the Federal Trade Commission’s Franchise Rule in 1979, and subsequent revisions, IFA has been a strong proponent of voluntary disclosure.”
Key results from the report show the following trends:
In 2016, 66% of franchisors include financial performance representations in the franchise disclosure documents; this is up from 52% in 2014.
More than 92% of franchisees say that this information helped them understand the opportunity, perform due diligence, and write their business plan.
Forty-seven percent (47%) of franchisors disclose operating expenses, and 24% provide information about profitability, including operating income, earnings before income, taxes, depreciation, and amortization (EBITDA), gross profit, or net income.
97% of lenders say they are more likely to make a loan deal for a franchise brand that provides financial performance information in an item 19.