The ONE Big Question to Ask Before Purchasing a Franchise
What is the one thing you always want to ask as a businessperson? The first question that comes to my mind is, “How much money can I make”?
No, this is not a secret. Good luck getting an answer to that from a franchisor though; and for good reasons. Because most franchisors will decline to answer this question, as the individual performance is hard to gauge and they may not have elected to disclose it in proper terms in the FDD.
But there is one more thing you do to get clarity… Let me explain…
The one thing you cannot get away from, if you are considering a franchise, is the FDD (Federal Disclosure Document). FDD, of course, is the pre-sale disclosure document that every prospective franchisee must receive at least 14 days prior to signing any agreements. And within this FDD, is a section called, Article 19.
The Federal Trade Commission, defines the Item 19 as, “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.”
See? It gets tricky now… Here are a couple of things to take away from it:
THE BASIC 19
Basically, the franchisor must be very specific about the location. In addition to that, the FTC does not require any specific language to declare that the franchisee’s individual earnings may vary. So be careful.
This is how the Montessori League Academy declares Item 19; Of course, Item 19 is four pages long, and this is just a part of it:
“Actual Financial Data from Montessori League Academy Commercial Center 101, Flamingo & Pines, FL. As of 12/28/2016:
Year 2014 Gross Revenue: $824,097
Year 2015 Gross Revenue: $835,649
Year 2016 Gross Revenue: $932,758
Gross Sales less the Costs of Goods Sold and Labor Expenses does not reflect the actual potential income of a School and should not be relied on in calculating profitability. There are a number of fixed and variable costs associated with a School, not all of which are reflected in the information above and that vary among individual Schools. These expenses, which are likely to be significant, include, but are not limited to, the following: the certain costs listed above, costs described in Items 6 and 7 of this Franchise Disclosure Document, including the 6.75% royalty fee; interest or finance charges if you finance some or all of the cost of the franchise; depreciation on property and equipment; occupancy costs (including rent, maintenance, insurance and utilities); store supplies; credit card fees; worker’s compensation and general liability insurance; taxes; national brand marketing fund; customer service and training fund; tech fund; accounting and legal fees and general administrative expenses; any pre-opening or amortization of organization costs; costs associated with regulatory compliance; management costs; fringe benefits; and certain repairs and maintenance. We strongly encourage you to consult with your financial advisors in reviewing the table and, in particular, in estimating the categories and amount of additional expenses you will incur in establishing and operating a School.”
WOW, did you see that? That’s just part of Item 19. But here is the trick.
Look for dollar signs… For an entrepreneur, you are probably used to doing that. Start your focus on that and then scan the rest, to keep everything in perspective. The FTC requires a lot of things to be said, to protect both, the franchisor and the franchisee, but that is no reason to be confused, and walk away from the document feeling a bit frustrated and not having the answers to make a decision.
DISCOVER THE “FEEL”
Here is something else to consider, before your question “How much money can I make” can make any sense. Item 19 is a great addition. But you have to be aware that depending on the business, it might take you years to ramp to those earnings. Besides considering the obvious return on investments and other common expenses, as described above in the example, you must get the actual feel for the business. And the only way to do this is to actually have foot on the ground.
Figure 1: Montessori Ivy League Academy displaying the Montessori environment
If the franchisor has a Discover Day program, take advantage of it, sooner then later. For example, we encourage our potential franchisees, at the Montessori League Academy, to come in and actually walk around and “feel” the environment. Every industry has a specific environment, and you want to be sure that the franchise that you are investing in actually exists in an authentic way. Only then you can match the earning potential with the actual product, and make an intelligent decision.
That’s the reason this one question, “How much money can I make” does not have to be allusive, and you should get the answer clearly, and as you deserve, to help you make the right decision.
Montessori Ivy League Academy and Montessori League Academy Franchise is a progressive private Montessori preschool, dedicated to recapture the 100-year-old tradition of Maria Montessori, and provide opportunities to own a Montessori preschool franchise, at the lowest cost and the lowest risk, while supporting and training for success of the business, as well as the children they serve. Montessori League Academy. 282 S Flamingo Rd. Pembroke Pines, FL 33027
www.TheMontessoriFranchise.com
Shaun Ajani has over a decade of consulting experience with fortune 500 companies. Currently, he is the VP of franchising for the Montessori League Academy. He has written many books and articles on business theories & global change, and has appeared in all the major television networks, including CBS, NBC, FOX, and ABC. Shaun has many professional certifications from institutions like Gartner Institute, Harvard University, and Sloan School of Business, and holds a business degree from University of Houston. Shaun is a proud communications volunteer for the Aga Khan Foundation, a global alleviation organization. He is a contributing writer for many blogs and magazines, including the popular The Franchise Dictionary magazine. Shaun Ajani lives in Miami with his family.
