Franchisors Check Your Franchise Disclosure Document Math

Published on July 04, 2017

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Among all the Items in the FDD, the tables and related content in Item 20 often receives a cursory review compared to the other Items. Despite this fact, 3 areas in Item 20 garner the most attention: the number of franchisee terminations, new franchise units and the difference between outlets opened and number of outlets at the end of the year.

A recent report by Franchise Grade revealed that 13% of franchisors had errors disclosed in their Item 20. One of the key tables is Table 3, Status of Franchised Outlets, which shows the differences between outlets at the start of the year and outlets at the end of the year and the reasons for franchisees leaving the system. Although Table 3 can include a good amount of entries, there is no valid reason why there should a discrepancy in the numbers.

Among the 10 major franchise sectors, there were 3 franchise sectors that had the highest percent of errors in Item 20.

  • Personal Services 25.6%
  • Quick Service Restaurants 18.2%
  • Commercial and Residential Services 16.2%

You can review the details here.

Statistics aside, when errors are found in one of the most important disclosures in the FDD, it’s a good bet that it will prompt the prospective franchisee and their attorney to be more cautious before accepting some of the other disclosures. This is a direct result of the fact that the growth of a franchise system and the number of franchisee terminations over a year or longer is viewed as a significant measure of how healthy a franchise is. When errors are found in Item 20 it casts doubt on the accuracy of the information in Item 20 and the rest of the document.

As a franchisor, be sure that the math in your disclosure document is correct, not just in Item 20 but in any of the Items where financial information is disclosed.


About the Author: Ed Teixeira
Ed Teixeira is a recognized franchise expert with over 35 years experience in the franchise industry. He has served as a corporate executive for franchise firms in the retail, manufacturing, healthcare and technology industries and was a franchisee of a multi-million dollar home healthcare franchise. Ed is the author of Franchising From the Inside Out and The Franchise Buyers Manual. He has participated in the CEO Magazine Roundtable Meetings with business leaders from around the country and spoke at a number of venues including the International Franchise Expo and the Chinese Franchise Association in Shanghai, China. Over the course of his career, Ed has been involved with over 1,000 franchise locations and launched franchise concepts from existing business models. Ed can be contacted at 631-246-5782 or ed.teixeira@franchisegrade.com.
Franchisors check your franchise disclosure document math

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