Item 19

There’s an old adage that the worst presentation is the one that’s never given. This seems to be a mantra many franchisors apply to the presenting financial data in their Item 19 disclosure in their Franchise Disclosure Document (FDD). Too often, franchisors rush to publish an Item 19, despite results that might not be as stellar as hoped. Item 19 of the FDD is like a peek behind the curtain. It’s where franchisors can showcase the potential earnings of their franchise units. It’s akin to the section of a dating profile where people list their most impressive achievements. While it doesn’t tell the whole story, it certainly captures your attention. The primary reason franchisors opt to present an Item 19 is their belief it is the key to unlocking significant future sales. While this might seem like the ‘easiest path,’ it’s not always the wisest choice. Consider the fitness industry, for example, where I recently conducted a study. One of the sector’s most successful concepts, Orange Theory, chooses not to disclose an Item 19. They operate over 1100 units and have ranked as high as 23rd on Entrepreneur Magazine’s Franchise 500 List. If an Item 19 is so crucial to a franchise system’s sales, how has Orange Theory achieved such remarkable success? Interestingly, depending on the franchise industry, 20-50% of concepts opt not to present this data. So, how do they manage to sell units? In my view, many franchisors rely on presenting Item 19 data as a crutch. Although this information can certainly aid in growing a franchise system, there are several other tactics in the sales process that can be equally, if not more, effective. As an outsourced CFO, you might be thinking this article is counter-intuitive to most advice someone like me would give. This is not to say that financial performance is not important.  Financial performance is a critical element that will determine if a prospect moves forward. But, there is a better way to go about this. In this article, we’ll explore how to execute a sales process without Item 19. We’ll share three critical factors to present to your prospects to help them evaluate whether your system is the right fit for them. Strategy 1: Teach The Flaws with Item 19 Data I have put together several Item 19 presentations for clients. While I use a high ethical standard for this presentation, I can’t help but question why the industry has chosen to present data in this manner.  There are several flaws in the data presented in Item 19s.   Firstly, the data is unaudited. This means that the financial information provided by franchisees, who are often not bookkeepers, is only as reliable as their reporting skills. Franchisors’ obligations in gathering this data do not extend to verifying its accuracy through independent audits. They rely on the information franchisees provide, which can vary greatly in quality. Secondly, the net income reported for small businesses can be highly inaccurate due to the commingling of personal and business expenses. It’s not uncommon for a franchise owner to use a single account for both business expenditures and personal expenses. For example, a franchisee might charge a all of their fuel to a business credit card (hopefully the IRS isn’t reading this), thereby inflating business expenses and understating net income. Franchisees exhibit varied levels of operational efficiency. Skills and experience differ significantly across the board, leading to wide variances in profitability, even within the same franchise model. Franchisors don’t exclusively showcase their top-performing franchisees in Item 19. Therefore, the data often reflects a broad spectrum of operational skills and other variables, including geographical differences. Presenting this reality clearly to prospects is in franchisors’ best interest. While many potential franchisees clamor for this data, it should be approached with caution. At its best, the data requires careful interpretation; at its worst, it could lead to poor financial decisions. By understanding the nuances behind Item 19 data, prospects can make more informed decisions, ones not solely based on the results of other franchisees. Strategy 2: Focus on Differentiators and Efficiencies As I highlighted earlier, I have been taking a deep dive into the franchise fitness industry. After of food concepts, health and wellness may be the second largest segment of franchising.  It constantly amazes me how many fitness concepts there are.  At least on the surface, several of them are the same. If this is true, then how does one separate themselves to a prospective franchisee? First, lets take a step back.  In my personal opinion as an outsourced CFO, several of these franchise businesses are bad concepts. They should have never been franchised in first place. Yes, the owner most likely had some great success with their location.  However, that doesn’t necessarily mean the concept will work without them running it.  This is an important theme to note. The owner in several of these business is the differentiator or the reason for efficiency. Sadly for any franchises that open up the concept, the original owner is one trait that can not be duplicated. Franchise concepts with lasting success have key differences and efficiencies. For anyone thinking about franchising their business, they should watch “The Founder”, the story of Roy Kroc.  Set in the 1950s, it shows how the efficiencies in his business were innovative and created a real competitive advantage for a McDonalds franchisee. There is a scene in a parking lot where he has a chalk outline of the kitchen of one of his locations and how each employee will operate.  For restaurants during this time, this was true innovation. True differentiators or efficiencies will sell your concept to prospective buyers. Further, if you can numerically detail out the advantages these will give the buyer, this will be heavily impactful on their decision.  Here is the truth – several concepts can’t do this because they don’t exist. If your reading this article and I am describing your business, then this may be you. However, if you can truly