This lesson is part of our free Franchise 101 course.
A franchise disclosure document (FDD) gives you a lot of raw information about a franchise, but none of that is meaningful until it’s put in context. Whether a $10,000 expense sounds big or small depends on what earnings you receive in return and what the equivalent expense is elsewhere.
My FDD Talk reviews end with a section called The Bottom Line, designed to give you that perspective. So what will this section tell you?
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The first part of the review covers the most important financial information in the FDD. This is the big, obvious financials that franchises disclose, including average revenues, expenses, and operating income.
An FDD only presents these figures in themselves, but The Bottom Line section puts them in context. I show how figures like the sales-to-investment ratio compare with other franchises in the same industry, so that you can see how a franchise compares with its competitors.
It’s also important to know how a franchise’s current performance compares with its recent history, as this tells you whether it’s improving, worsening, or stable. The Bottom Line section compares the current average revenue to the two previous years’ averages, so you can see which way the business is going.
Evaluating Expenses
Not all franchises provide detailed expense information in Item 19 because some franchisors are unable to get reliable expense data from their franchisees. However, The Bottom Line section digs into the most important expenses when available. These include the cost of goods sold, labor, and rent.
Most prospective franchisees are looking for information on net operating income, or EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). This gives you an idea of how much you’ll be left with after deducting all operating expenses from revenues.
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Fees
The last part of The Bottom Line section provides information about royalty fees and/or marketing fees. Franchises have to disclose these, so it’s one part of the figures we can be certain about, and where comparisons can easily be made.
Those comparisons are where FDD figures gain their value. Putting them in the context of past performance, the wider industry, and a broad knowledge of how franchising works will help you understand what the information means. It’s why I came up with The Bottom Line section, and why it can be of so much value to you.
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