Are you riding a wave, smooth sailing, or is your ship sinking?
In order to truly know where your franchise investment is, Fortman Law recommends that all franchisees do three things each year: (1) request the new franchise disclosure document (FDD), (2) request ad fund accounting, and (3) review your financials.
1. Request the New Franchise Disclosure Document (FDD).
As a potential franchisee, you were given that year’s FDD to review the investment opportunity. As a current franchisee, you should continue to review each year’s FDD. While franchisors do not normally distribute the FDD to their current franchisees, they will if you ask for it. So ask! Even if the franchisor refuses, you can usually obtain copies online. For example, California posts the franchise agreements for most franchisees through the California Department of Financial Protection and Innovation. Every year you should get the new FDD and review it. As a franchisee you should be reviewing each new FDD to stay informed of the health of your franchise investment. For example, you should review closures, new sales, and financials of the franchisor. In particular you should be comparing them to the year (or years) prior which will allow you to see trends in the franchise sooner rather than later. We also recommend you reach out to a couple franchisees that have recently closed and try to ascertain why. After you talk to those who have closed, reach out to a couple that recently opened and welcome them to your franchise. While it may seem like you are competing against your fellow franchisees, you should not be. You are all invested in the same franchise, and you should be working together to improve that investment. This network will help you not only be a better franchise investor, but it will also allow you to see warning signs of a bad franchise investment much sooner.
2. Request Ad Fund Accounting.
If you are a franchisee that contributes to an ad fund, you should be requesting the accounting of that fund every year. Please note that this might be both at the franchisor (national) level and/or the local level in the form of an ad pool. Either way (or both ways) you should request the accounting of any ad fund you are contributing to each year. However, it is not enough just to request the accounting, you must also review the accounting. You want to review the accounting to be sure the ad fund is being spent according to the terms of your contract. If you are unsure of the terms of your contract, you should also re-evaluate your contract and seek legal advice if you are still unclear.
3. Review Your Financials.
It is crucial that you do a detailed review of your financials every year. We are not talking about just filing a tax return. We are talking about a detailed review of your income, your expenses, your liabilities, and more. This kind of detailed review will provide you with two benefits: (1) It will help you better understand your true financial condition and (2) it will help you assess what is working (and not working) which allows you to make informed adjustments. While the tax return is a summary of the information, it alone will not provide you with the detailed minutia information you need to properly assess your franchise investment.
Doing these three things each year will not only help you be a better franchise investor, but it will also allow you to see warning signs of a bad franchise investment much sooner. In the end, knowledge is power. These three things will provide you with the knowledge you need to stay informed of your franchise investment. It will help you better assess whether to continue riding the wave, keep smooth sailing, or whether your ship is sinking.
As always if you have any questions or concerns about how to do this, please do not hesitate to contact us.