Entrepreneurship & Small Business

Franchise Disclosure Statement doesn't disclose financial information and franchisee list, is this normal?

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Deal Addict
Oct 8, 2015
4282 posts
4638 upvotes
Province of Bring Ca…

Franchise Disclosure Statement doesn't disclose financial information and franchisee list, is this normal?

Hi, I'm looking to buy a franchise which is just getting started less than two years ago.

I received the FDD a couple days ago. When I finally got me ass sit down and read it, I found it's missing some important information.

In the FDD it says:

Attached to and forming part of this disclosure document are the following Schedules:
Schedule A – Standard Franchise Agreement (the “SFA”);
Schedule B – Financial Disclosure;
Schedule C – Franchisee List


The last page of the FDD (Receipt of Disclosure) also needs me to sign and confirm that I receive all the FDD and along with those Schedules.

but I perused the FDD and found no Schedule B,C,D,E. Since I'm a totally n00b and I think the information seems important to me, I asked for them from the franchisor and got a response saying those information will be sent out to me once the construction starts, meaning way after I pay the franchise fee and location selection process and all other stuff.

Is it normal to not having those info in the FDD? Or you think this is a really big red flag?

Thanks
8 replies
Member
Oct 31, 2006
294 posts
151 upvotes
the financial projections for franchise systems is a touchy topic. You absolutely need them but alot of franchisors don't readily provide them because there are legal liability issues. The topic is heavy and you need an answer from a franchise lawyer not RFD.
Deal Fanatic
Sep 23, 2007
5654 posts
2168 upvotes
Several points to point out:
-Yes those documents should be provided if the franchise is 2 years into operations. You have every right to not sign until you see what you want to see. If they are selling you it will be sent out once construction starts, that's a STRONG red flag.

-Those documents, even if provided, are far from being a sure sign of safety. If the franchisor has a good accountant, they can easily make numbers look nice.

-The thing with franchises is, a lot of them do well when they first open. Sometimes cooking the books is not even necessary. Then they lose steam and the new shops cannibalize the older shop's sales. The franchisor (especially if from Taiwan), usually have the strategy of trying to ride the wave, and collect as much franchise fee as possible. So maybe the very first shop they open in Canada they own as corporate. They make sure that one does well and look nice so they can use as sample to show prospective franchisees like you. Then they collect a ton of franchise fees and then the brand starts to fade. The hype nearly always die down quick, or there's a lack of effective marketing. Once they got a lot of shops to open, their focus shifts to managing the franchisees such that they take the risk, and the franchisor collects the royalties.

Taiwanese bubble tea shops are a prime example. There are TONS of them. But the same concept happens in every niche.

If you can't work out some assurance with the franchisor, and have to resort to an online forum, I'd say deep down you probably have strong doubts already....I don't have all the facts and details but it sounds like you might want to reconsider the project.
Deal Addict
Oct 8, 2015
4282 posts
4638 upvotes
Province of Bring Ca…
BananaHunter wrote: Several points to point out:
-Yes those documents should be provided if the franchise is 2 years into operations. You have every right to not sign until you see what you want to see. If they are selling you it will be sent out once construction starts, that's a STRONG red flag.

-Those documents, even if provided, are far from being a sure sign of safety. If the franchisor has a good accountant, they can easily make numbers look nice.

-The thing with franchises is, a lot of them do well when they first open. Sometimes cooking the books is not even necessary. Then they lose steam and the new shops cannibalize the older shop's sales. The franchisor (especially if from Taiwan), usually have the strategy of trying to ride the wave, and collect as much franchise fee as possible. So maybe the very first shop they open in Canada they own as corporate. They make sure that one does well and look nice so they can use as sample to show prospective franchisees like you. Then they collect a ton of franchise fees and then the brand starts to fade. The hype nearly always die down quick, or there's a lack of effective marketing. Once they got a lot of shops to open, their focus shifts to managing the franchisees such that they take the risk, and the franchisor collects the royalties.

Taiwanese bubble tea shops are a prime example. There are TONS of them. But the same concept happens in every niche.

If you can't work out some assurance with the franchisor, and have to resort to an online forum, I'd say deep down you probably have strong doubts already....I don't have all the facts and details but it sounds like you might want to reconsider the project.
This is really great insight! As much as I love the business, my guts is telling me something is not right and I cannot really find somewhere to discuss such as reddit or rfd.
Member
Oct 31, 2006
294 posts
151 upvotes
Even if they give you projections they might have done a shitty job
Deal Addict
Oct 8, 2015
4282 posts
4638 upvotes
Province of Bring Ca…
By the way, the corpordate store started 20 years ago but they began to franchise the business a little over an year ago. Does that mean since it's only one year they don't need to provide financial statement?
BananaHunter wrote: Several points to point out:
-Yes those documents should be provided if the franchise is 2 years into operations. You have every right to not sign until you see what you want to see. If they are selling you it will be sent out once construction starts, that's a STRONG red flag.

-Those documents, even if provided, are far from being a sure sign of safety. If the franchisor has a good accountant, they can easily make numbers look nice.

-The thing with franchises is, a lot of them do well when they first open. Sometimes cooking the books is not even necessary. Then they lose steam and the new shops cannibalize the older shop's sales. The franchisor (especially if from Taiwan), usually have the strategy of trying to ride the wave, and collect as much franchise fee as possible. So maybe the very first shop they open in Canada they own as corporate. They make sure that one does well and look nice so they can use as sample to show prospective franchisees like you. Then they collect a ton of franchise fees and then the brand starts to fade. The hype nearly always die down quick, or there's a lack of effective marketing. Once they got a lot of shops to open, their focus shifts to managing the franchisees such that they take the risk, and the franchisor collects the royalties.

Taiwanese bubble tea shops are a prime example. There are TONS of them. But the same concept happens in every niche.

If you can't work out some assurance with the franchisor, and have to resort to an online forum, I'd say deep down you probably have strong doubts already....I don't have all the facts and details but it sounds like you might want to reconsider the project.
Deal Fanatic
Sep 23, 2007
5654 posts
2168 upvotes
naticom wrote: By the way, the corpordate store started 20 years ago but they began to franchise the business a little over an year ago. Does that mean since it's only one year they don't need to provide financial statement?
I can't remember the details. A franchise lawyer is your best bet. Yes there is a rule that new franchisors don't need to provide financial statements if their first year of operation has not elapsed.

Regardless of this rule, I think a good franchisor should be trying to work with you and try to be transparent. If they can't provide financial statements, they should at least try to provide some other information to satisfy your concern. A franchisor that tells you to pay first and send you later sounds sketchy as hell to me.

I actually suggest you don't focus on the official projections or actual numbers of financial statements. What you should do if you are investing 6 figures into a business, is to camp out at their existing location. You can observe their CURRENT level of sales and this should be a better indicator than anything on a piece of paper.
Deal Addict
Oct 8, 2015
4282 posts
4638 upvotes
Province of Bring Ca…
BananaHunter wrote: I can't remember the details. A franchise lawyer is your best bet. Yes there is a rule that new franchisors don't need to provide financial statements if their first year of operation has not elapsed.

Regardless of this rule, I think a good franchisor should be trying to work with you and try to be transparent. If they can't provide financial statements, they should at least try to provide some other information to satisfy your concern. A franchisor that tells you to pay first and send you later sounds sketchy as hell to me.

I actually suggest you don't focus on the official projections or actual numbers of financial statements. What you should do if you are investing 6 figures into a business, is to camp out at their existing location. You can observe their CURRENT level of sales and this should be a better indicator than anything on a piece of paper.
Thanks again for sharing with me all these great information. I'm not hurrying into the business. One of their most recent outlets just opened across the street. I'm planning for observe the business for a couple of months then decide if I should dip my toes into the water.
Deal Fanatic
May 22, 2003
9325 posts
6385 upvotes
Vancouver
BananaHunter wrote:

-The thing with franchises is, a lot of them do well when they first open. Sometimes cooking the books is not even necessary. Then they lose steam and the new shops cannibalize the older shop's sales. The franchisor (especially if from Taiwan), usually have the strategy of trying to ride the wave, and collect as much franchise fee as possible. So maybe the very first shop they open in Canada they own as corporate. They make sure that one does well and look nice so they can use as sample to show prospective franchisees like you. Then they collect a ton of franchise fees and then the brand starts to fade. The hype nearly always die down quick, or there's a lack of effective marketing. Once they got a lot of shops to open, their focus shifts to managing the franchisees such that they take the risk, and the franchisor collects the royalties.
Sounds like Menchie's. For awhile they were opening a few locations near me and within a couple years they all closed down.

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