The vast majority of franchisors fail to reveal any franchised unit expense information in their Franchise Disclosure Documents, according to a new report by independent market research firm FranchiseGrade.com. Franchise Grade also finds that healthy franchise systems are more likely to make at least some disclosure about their system’s financial performance than unhealthy ones.
Franchise Grade reviewed financial performance representations in Item 19 of the FDD for 1,880 franchisors, broken down into 1,027 “healthy” systems and 853 “unhealthy” ones using a proprietary benchmark. The report found that 82 percent of the healthy systems and 91 percent of the unhealthy systems made no disclosure of unit expenses.
Without expense data, it is virtually impossible for a prospective franchisee to project how profitable a franchise will be and thus whether investing is worth the substantial risk. This parallels the analysis in a petition
filed with the Federal Trade Commission, which found that 10 of the 14 leading systems surveyed provided no information on franchisee expenses in Item 19.
Some of the expense information franchisors do provide is inadequate for prospective franchisees. For example, McDonald’s Item 19 provides no data on rent, a major franchisee expense, which is under McDonald’s control as the landlord. And more complete data would have helped the 20 Papa Murphy’s franchisees who are suing the pizza chain claiming that they never would have invested
if Papa Murphy’s had disclosed that stores in the South have lower sales than those elsewhere.