A critical but often misunderstood category in the Franchise Disclosure Document is Additional Funds or working capital which is the last category in Item 7 – Estimated Initial Investment. Most franchisors provide an Additional Funds or working capital amount of three months. These funds are estimated to cover expenses to operate the franchise during the initial period of operations.
The FTC states that “The “initial period” of operations may vary from franchisor to franchisor. In general, a reasonable period is at least three months. Franchisors may use a longer period that is reasonable for the industry. Franchisors must disclose the specific initial period used, and describe the factors, basis, and experience they considered or relied upon to calculate their estimate of “additional funds.”
There is no mandate or requirement for a three month period. A key consideration regarding working capital should be the implication that the franchise can reasonably become cash flow neutral or profitable in their operations within the reported Item 7 additional funds timeframe. By providing a three-month estimate for working capital the overall franchise investment may be underestimated.
We have completed a study on the changes in Ongoing Fees in the franchise industry using our data from 2013 – 2016 to publish the report.
A Franchise Disclosure Document (“FDD”) presents key components of the franchise program including the obligations of the franchisor and franchisees.
As franchise system development becomes more competitive franchise systems are employing a new strategy to grow their brand and increase franchise sales.
The composition of the franchise investment differs in key areas such as: franchise fees, royalty rates, territory protections and Item 19 disclosures.
Data has become essential to having a successful franchise development team. Those that maximize the power of data will sell more franchises.
When reviewing an FDD, we always keep our eyes out for any errors. The error that is the most troublesome for us is when we see Item 20 errors.