Confidential report provides data prospective franchisees would love to have

Before investing in a franchise, prospective franchisees would undoubtedly benefit from access to detailed financial reports on their respective franchise systems and on current franchisees’ financial performance. Ideally, the reports would show unit operating revenues and expenses, break-even points, and typical owner compensation – in other words, key data about how much money a franchisee can expect to make. There is such a report, but unfortunately, franchisees can’t see it. Only lenders can.

The “Bank Credit Report,” prepared by franchising clearinghouse FranDATA using confidential franchisor information,  provides a full financial performance profile of a franchise system to help lenders assess the risk of lending to the system’s franchisees.

The Bank Credit Report is “designed for one audience only – lenders,” according to a report presented at the International Franchise Association’s Legal Symposium. “Lenders who access the report are asked to sign a Non-Disclosure Agreement, which prohibits them from showing the report to would-be borrowers.” In other words, as one franchisor put it “We don’t have to worry about franchisees being able to see that BCR.”

Lacking access to the Bank Credit Report, franchisees have to rely on the franchisor’s often inadequate financial performance representations made in Item 19 of the Franchise Disclosure Document, if the franchisor makes any representations at all. An analysis of 14 leading franchise systems in SEIU’s recent petition to the FTC found that three franchisors do not disclose any information under Item 19, while seven provide some financial performance information but no franchisee expense information and thus no direct gauge of franchisee profitability.

Four of the systems provide some franchisee expense information; however, the level of disclosure varies. For example, McDonald’s discloses some franchisee expense information but reveals nothing about one of franchisees’ biggest expense categories: rent. Rent can claim up to 16 percent of a franchisee’s sales and is almost entirely within McDonald’s control as the landlord of virtually all franchisees.

Was there a big gap between what your franchisor told you you’d earn and your actual results? Do you wish you’d had a Bank Credit report before deciding to invest? Share your story.