Joel Libava
As you look for a franchise to buy, it’s easy to get “in the weeds”.* I’ll show you what I mean.
*There are two definitions of the term “in the weeds, and they’re very different.
1. This is a term used by food-service personnel.
For example, when Sue and I were a popular serving duo at one of Cleveland’s finest (and hippest) restaurants years ago, and our area of the dining room was sat all at once-and we felt overwhelmed, we’d be “in the weeds.”
2. This definition refers to people…especially those who tend to be a skosh analytical, get stuck in the details.
Really Stuck!
I’m talking so stuck they frequently can’t escape…so they can’t make a decision. Or they delay and delay and delay, because they “still need more data.” And sometimes the data confuses them-which is never good.
For example, let’s say you’re interested in learning more about pizza franchises.
So, you go to a popular franchise opportunity portal and start looking for pizza franchises for sale.
You find a few that look interesting, and you request information from them.
3 weeks later, after receiving more information (by talking with the franchise reps), you eliminate all but one. It turns out that Pizza Hut shows the most promise. (In your opinion) This is when things get interesting.
The Pizza Hut Franchise Disclosure Document (FDD)
Now that you’re getting fairly serious about Pizza Hut, your franchise development representative does too, and sends you the FDD.
FYI: Once you receive the FDD (and start looking it over) things change. The “fun” part of finding that “perfect” franchise to own all of a sudden becomes a little less fun. But not in a bad way. Things just become more businesslike.
Suggested Reading: Don’t Freak Out When You Get The FDD
One more thing: the Pizza Hut FDD contains an earnings claim.* That means the company discloses financial information about their franchisees. In other words, you’ll be able to see some figures.
*The FTC’s Franchise Rule permits a franchisor to provide information about the actual or potential financial performance of its franchised and/or franchisor-owned outlets, if there is a reasonable basis for the information, and if the information is included in the disclosure document. Financial performance information that differs from that included in Item 19 may be given only if: (1) a franchisor provides the actual records of an existing outlet you are considering buying; or (2) a franchisor supplements the information provided in this Item 19, for example, by providing information about possible performance at a particular location or under particular circumstances.
(Looking at the figures from the FDD)
The Figures
Here’s part of what you’ll see from the Pizza Hut FDD* concerning their earnings claims.
*The Pizza Hut FDD is available to the public-for free, on the Wisconsin Department of Financial Institutions website.
Set forth below are historical data for certain domestic traditional Pizza Hut outlets owned and operated by PHLLC or its affiliates (“Company-Owned System Restaurants”) and certain domestic traditional Pizza Hut outlets owned and operated by franchisees (“Franchised System Restaurants”).
MATURE FRANCHISED SYSTEM RESTAURANTS
The financial performance representations below provide certain information regarding the Franchised System Restaurants – of the Dine-In/Red Roof, RBD and Delco Delivery/Carryout Restaurant Concept type – – that were open and operating for at least one year as of December 31, 2017 (“Mature Franchised System Restaurants”). Specifically excluded from the definition of Mature Franchised System Restaurants are those DBR/FCD System Restaurants; Carryout-only System Restaurants; seasonal System Restaurants; Express restaurants (for PHLLC FDD 201864 which franchises are offered under a separate disclosure document); any type of System Restaurant that reported sales for 24 or fewer days in each financial period; or, any type of System Restaurant other than traditional Dine-In/Red Roof, RBD and Delco Delivery/Carry-out System Restaurants. As of December 31, 2017, although there were a total of 6,021 Franchised System Restaurants, there were 4,285 Mature Franchised System Restaurants -See Note 11.
Mature Franchised System Restaurants of the Dine-In/Red Roof and RBD Restaurant Concept type
Number of System Restaurants in Sample Set = 2,056
Number of System Restaurants Attaining or Exceeding Average Gross Sales Percentage of System Restaurants- 912
Percentage of System Restaurants Attaining or Exceeding Average Gross Sales Percentage of System Restaurants – 44.4%
AVERAGE GROSS SALES
(note 1) $898,037
Lowest/Highest Numbers in Range $225,766/$2,537,179
Median $861,470
Maybe you should read that entire section again.
And again.
Are you getting in the weeds yet?
Give it time.
More Important Stuff As You Look For a Franchise To Buy
More From the Pizza Hut FDD:
This Item 19 financial performance representation has been prepared based upon calculations which do not take into account any adjustment required pursuant to the Financial Accounting Standards Board’s accounting standards regarding revenue recognition related to loyalty program transactions. Under these standards, you may need to defer the recognition of a small percentage of your Gross Sales.
This financial performance representation represents the averages for certain subsets of all System Restaurants in the continental United States and Alaska during the calendar year 2017.
A new franchisee’s results are likely to be different from the results stated in this financial performance representation. As noted in the charts above, the Mature Company-Owned System Restaurants do not have certain expenses that your franchised System Restaurant will have, such as payment of Monthly Service Fees. In addition, Company-Owned System Restaurants, as well as certain of the Mature Franchised System Restaurants (owned by franchisees that operate a large number of System Restaurants) included in the tables above, benefit from economies of scale that are not available to System Restaurants that are owned singly or in small groups by a franchisee.
**** Intermission ****
If you want to take a breather here, you can. Give your eyes (and brain) a rest.
Watch a video. Hit the restroom. Take the dog out for 5-10 minutes.
via GIFER
Ready to continue?
Let’s go!
Characteristics of the included Mature Company-Owned System Restaurants and Mature Franchised System Restaurants may differ materially from the characteristics of System Restaurant(s) that you may acquire or develop depending on your experience, competition in your trade area, the physical condition of the included System Restaurants as compared to your System Restaurant(s), employment and labor conditions in your trade area, and the length of time that the included System Restaurants have operated as compared to your System Restaurant(s). The type of System Restaurants included in the overall data sample of this Item 19, and in each subset identified above, may also differ from the type of System Restaurant franchised to you. (See Item 1 for a description of the different types of System Restaurants.) Some outlets have earned this amount. Your individual results may differ. There is no assurance that you’ll earn as much.
Written substantiation for this financial performance representation is available upon reasonable request.
PHLLC recommends that you make your own independent investigation to determine whether or not the franchise may be profitable, and consult with an attorney and other advisors before PHLLC FDD 201867 signing the Location Franchise Agreement.
Wow.
Here’s How I Would Write An Earnings Claim
Look:
Of the 2,345 franchise businesses currently operating in our system, 420 of them had average gross sales of $895,044 from 2012-2018.*
In addition, 922 franchise businesses had average gross sales of $674,119 during the same period.**
The remaining 1003 franchise businesses reported average gross sales between $299,003-$625,665 between 2012-2018.***
Easy-peasy. Except…
* In December of 2014, the Mercury Retrograde had a major negative impact on sales, so we didn’t include that month in the figures. In addition, since 2012 was a leap year, one month (February) was short, and our accountants got a little confused and they decided to not record sales (at all) for February 2012. So there’s that.
** In 2015, the fast-food worker’s strike forced 34 franchises to close for 2 weeks, and had a substantial impact on the bottom line. In addition, food vendors had to throw away or donate 1900 pounds of lettuce and tomatoes during those weeks, and some of them canceled their contracts with us. (Jerks!) One more thing: a partial Lunar Eclipse on the night of July 19th (only visible in Australia) freaked out several hundred Nunga Aboriginal tribe members. Because of that, restaurants in the Southern part of Australia experienced an 88% drop in business for 4 days…until things calmed down. (We removed those horrid figures from the average sales numbers that year.)
*** We, as a company, are only showing these weak-ass gross sales numbers because the FTC threatened us with fines if we didn’t.
In any event, know this:
If you end up buying a franchise with us, and you only manage to scrape out $300,000 of annual gross sales, we’ll terminate your franchise agreement faster than you can say LAWYER!…I Want My LAWYER!
I’m kidding. I would never write an earnings claim like that. But how crazy* is the wording in today’s FDD’s?
*I only used the Pizza Hut earnings claim (Item 19) because I wanted to use a recognizable brand as an example. There’s nothing inherently wrong with their FDD.
But FDD’s are written by attorneys.
People who have gone to Law school.
People who can write legalese with ease.
In The Weeds?
What if you’re interested…really interested in 3 or 4 different franchise opportunities. Can you imagine reading all of their FDD’s?
Exactly.
Now, if you’re like me, you won’t read the FDD’s word for word. You’ll scan them, and maybe even highlight the parts you’re having trouble understanding. In addition, you won’t base your decision solely on the FDD…on the data that’s included with it.
Tip: Read what my dad said about the FDD.
But if you’re highly analytical…if you HAVE TO read the FDD’s, word for word, and maybe even set a few spreadsheets up to keep everything organized, you may end up “in the weeds” for weeks. (See definition #2 at the beginning of this post)
So, don’t get stuck in an FDD.
Instead, after going through the FDD once, or twice at the most, reach out to franchisees.
Talk to them.
That’s the only way to get the information you need on whether you should buy the franchise you’re interested in, or continue your search.
Then, hire a franchise lawyer to help you decipher everything in the FDD. Franchise attorneys can quickly read and find the most important things their clients (you) need to know about.
Now, if you don’t think you need a franchise attorney by your side as you navigate through the franchise purchasing process…watch this video.
Finally remember this:
If you’re in the weeds, you can’t see anything but weeds.
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