Why it’s crucial to show actual earnings data
Should you provide earnings information in your disclosure document? This question has been a cause of disagreement since the creation of the Franchising Code of Conduct. If you are one of the franchises that doesn’t provide earnings information, is it time to review your position?
Why do some franchisors not provide actual earnings data?
First, let’s correct a common misconception about providing earnings information. It is not prohibited by the Franchising Code of Conduct. The Code does provide instruction on how the information is to be provided, but it does not prohibit the provision of historical or projected earnings.
Having said this, we encounter two common reasons for not providing earnings information to prospects. First is that the franchisor’s board and advisers are concerned that by providing earnings information they may be exposed to allegations of misleading and deceptive conduct. The second common reason is lack of relevant data on actual revenue and costs of operation.
Is there a problem with this?
From the perspective of the franchise buyer and their advisers, yes there is.
A prospective franchisee needs to make an informed decision and this includes understanding the financial aspects of the opportunity. Advisers can help by constructing a financial model based on the franchisee’s research and their own information. However, this is a less solid decision making tool than a model that draws on relevant historic data or even sound projections made by the franchisor based on their research and experience.
Still unconvinced? When else does a person make an investment decision without access to information provided by the business they are investing in?
You know the interest rate on a term deposit, the historic returns from a super fund, and the dividend history on shares. If you take a job you know the salary you will receive. A franchisee is investing their cash and taking out a loan to buy the business. So it makes complete sense for them to be provided with good data.
In our work, we find that most franchise prospects don’t have access to historic information about sales and costs. This is disappointing and frustrating, and we believe it leads to some prospects walking away from deals. Others enter into franchises only to discover that the actual financial performance is disappointing, or end up committed to costs that they struggle to bear.
What if you don’t have data?
Some franchisors don’t have sales or expenses data or it’s incomplete. Is this a good reason not to provide earnings information?
It’s often understandable if a franchisor doesn’t provide information. In some cases it’s genuinely difficult to collect and compile financial information. For instance, in a fixed fee franchise system where no sales data is collected, or where there is significant variation in franchisee performance, or in a new system where there’s limited data. It can also be costly to collect and organise data as this takes considerable expertise.
Nonetheless, it’s important not to let the difficulty of undertaking this exercise get in the way of considering whether you should provide earnings information. This decision is about how you run the franchise and your openness with franchisees.
First decide whether you believe this is the right thing to do. Then, if the answer is ‘yes’, work out what information you can collect, how to provide that to prospects, and how to manage your risk.
In our experience, collecting and disclosing financial information does not need to be complicated, it doesn’t necessarily require complex software and modelling or an army of consultants. But it does require commitment by the board and shareholders. It is a case of where there’s a will there’s a way.
So, in our view, the answer to the question ‘should you provide earnings information in your disclosure document?’ is yes.