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How Franchisors Can Build a Strong Item 19

How Much Money Can I Make?

As franchisors work to sell franchises, one question they will always be asked is, “how much money can I make?”. The answer to this question can be found within one section of the Franchise Disclosure Document: Item 19.

In order to create a compelling Item 19, franchisors need financial data on the performance of each franchise location. Typically, it is up to the franchisees to keep their books up to date and share that data with the franchisor. But, like many small business owners, they juggle countless responsibilities, may not understand the complexities of accounting, and bookkeeping understandably falls by the wayside. 

An Expert Team

Without the right tools, building a strong Item 19 can feel like a massive undertaking. But, with the support of a franchise bookkeeping team, franchisors can receive timely, accurate information that will help them build a compelling Item 19!

What is Item 19? 

Item 19 is a section in the Franchise Disclosure Document (FDD), a document that must be presented to individuals who want to purchase a franchise. The purpose of Item 19 is for franchisors to lay out the financial performance representations (FPR) of the franchise. It paints a picture of how potential franchisees can expect to perform and estimates how much money they could make should they join the franchise.

Why is Item 19 Important?

Item 19 is more than just a rundown of financial performance. It is a powerful tool that aids in decision making, builds trust between the franchisor and potential franchisee, and sets realistic expectations.

  • Decision Making. A strong Item 19 helps franchisors attract and select the ideal franchisee candidates. It also ensures that a franchise brand is a solid investment, and helps the franchisee compare their options to determine if they are joining a successful business. 
  • Trust and Transparency. Item 19 signifies financial transparency and creates trust between the franchisor and potential franchisee. It shows that a franchisor knows their numbers, and has no issue disclosing them. The more information that can be provided on financial performance, the better. This transparency creates strong relationships between franchisors and their franchisees. 
  • Realistic Expectations. Item 19 allows the franchisor to set realistic expectations for financial performance. While a franchise may be profitable as a whole, individual success can vary. An Item 19 that contains data-backed projections of how much potential franchisees could realistically make provides the clarity they need to make an informed decision. 

How to Build a Strong Item 19

What do franchisors need to build a strong Item 19? Put simply, clear, accurate financials. The key elements that create a powerful Item 19 are: 

  • Average Gross Profit
  • Average Gross Sales
  • Cost breakdowns of goods and services
  • Operating cost insights
  • EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)
  • Industry-specific data points (number of customers served, number of services provided or products sold, etc.)

These metrics provide financial insight into the franchise, clearly lay out the costs and obligations of a franchise purchase, and set realistic expectations for financial performance. 

The amount of information franchisors are able to share in Item 19 largely depends on the information their franchisees deliver. How can franchisees provide reliable, accurate information to their franchisors? It comes down to consistent monthly bookkeeping

The Necessary Resources 

Franchises have unique needs when it comes to bookkeeping and accounting, such as tracking royalties and advertising fees, and sometimes, multi-currency support. All of it needs to be properly recorded in accounting software so monthly reports can be produced. Franchisors need a team of trusted experts with knowledge of the franchise space, so they can receive accurate data from their franchisees.

  • Consistent Monthly Bookkeeping. In order for franchisors to build a strong Item 19, they need up-to-date financial records for each franchise location. A bookkeeper can provide visibility into financial performance on the franchisee’s behalf, so franchisors have access to the information they need across all locations

An online bookkeeping service is particularly helpful in this situation. Instead of hiring multiple bookkeepers, the franchisor can rely on a single provider who delivers uniform services for each location – no matter where they are located.  

  • Accurate, Up-to-Date Reports. Accurate monthly reports are crucial to creating a solid Item 19, as all information is legally required to be accurate, truthful, and backed by numbers. A well-documented financial history showcases franchise growth and profitability and helps franchisors create a compelling Item 19. 

Expert Bookkeeping for Franchise Businesses

Xendoo Online Bookkeeping is a leading provider of online bookkeeping and accounting services for franchise businesses. Our franchise-focused team provides franchisors with timely report delivery and visibility into financial performance for each location.

Are we a fit for your franchise? Let’s talk! Schedule your free consultation today.

franchise business owner

The Franchise Landscape by Jon Ostenson

On the heels of Covid lockdowns and quarantine, we are seeing unprecedented levels of interest in business ownership with much of this interest coming through the avenue of franchising. Year-to-date, our client placements have increased well over 50% vs. 2020, which despite Covid, saw similar levels of expansion over 2019. The vast majority of these placements have come in industries outside of food and lodging, which we will touch on later.

So who are these new franchise owners? More than ever before they represent a substantial cross-section of Baby Boomers, Generation X, and Millennials. As outlined throughout media headlines, Covid has caused many across the spectrum to reflect on their current path. For many, this reflection has led to the decision point that now is the time to scratch their entrepreneurial itch.

In some cases, these newly minted business owners are jumping in with both feet, leaving their corporate roles and taking on the reins of owner-operator of a new enterprise. In other instances, they are taking a step into entrepreneurship via a ‘semi absentee’ model with the plan to put in 10-15 hours a week. The latter group is seeing business ownership as an ‘asset class. Business ownership provides tax advantages that many other investments do not. With the stock market at an all-time high, low interest rate, and only so many good real estate deals available, investors are looking at alternative options for parking their record levels of sidelined cash. 

Why are so many opting for franchising over a traditional ‘start-up’? They recognize that franchising provides them with:

• A proven playbook from which to operate.

• In some cases, a recognizable brand.

• A ‘coach’ with aligned interests on the sideline in the franchisor.

• Support and learnings of owners in other markets.

• The ability to go in with ‘eyes wide open’ via the ability to review the Franchise Disclosure Document and validate with current owners before making a purchase.

• The potential for a more attractive exit based on an apples-to-apples comparison vs. traditional startups. 

So, what industries are resonating the most with would-be business owners? I have shared in many interviews that over the past year that we have seen a leaning toward ‘Covid, Amazon, Recession resistant businesses’. 95% of our placements have been in industries outside of food and lodging. These include home and property services, automotive, health and wellness, businesses that support the senior population, children/education, and pets. There are so many unique niches within these spaces that people have never considered. In fact, through my matchmaking process, I have found that over 80% of my clients end up in a sector that they never had on their radar prior to our ‘peeling back the onion’ and building a framework from which to evaluate opportunities.

Certainly, franchising is not right for everyone. For instance, I have to explain to a handful of my clients that they are ‘too entrepreneurial’. They are not willing to live within the franchise system, desiring to put their fingerprints all over a new business. However, for many would-be business owners, the support and resulting success rate that is found in franchising prove to be a perfect fit. Based on what we are seeing both at a macro level, as well as on the ground, franchising is poised for even more strong growth in the years ahead!

 

Jon Ostenson is a consultant, investor, author, and international speaker specializing in the area of non-food franchising. He draws on his experience as both the President of an Inc. 500 franchise system and as a multi-brand franchisee in serving clients across these capacities.

Connect with FranBridge here jon@franbridgeconsulting.com   Recent podcast interview

 

This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. Xendoo assumes no liability for any actions taken in reliance upon the information contained herein.