I have heard franchise attorneys say that prospective franchisees need the disclosure documents early on so they can make a business plan to see if the franchised outlet is feasible and I debated with them over this point of contention. Potential franchise buyers have also told me they wanted to put together a business plan for their evaluation process and therefore they need all the disclosure documents. They ask for these documents before they fill out the confidential questionnaire. We of course do not send out a UFOC without a completed questionnaire, which has been verified and we know the applicant meets our general approval and then check credit sources to see if they can actually afford it.
We have had potential buyers fill out the questionnaire and leave information out, because they did not feel comfortable with problems associated with identity theft and still want the documents. So that consumer puts us at a standstill. They want to put a business plan together to estimate the worthiness of the business, but need to know all the costs associated with it before they give us their information. Yet that information is readily available on most franchising web sites already. Of course we need to determine if they can even afford it (if they cannot we cannot spend the time on the sales process) or determine if they are one of the huge percentage of all inquiries that are competitors before we give away information contained in the UFOC. To top it off, we cannot assist them with earnings because we do not give earnings claims because we do not collect the data. This is because under the current rules we cannot substantiate or choose not to go to the expense to audit that data even though we know the answers after being in the industry for 27 years. They can call franchisees once they get the documents if they wish. But we cannot give them the disclosure documents pre-maturely. Now the FTC wants us to offer a UFOC because a potential buyer wants it or has asked for it and we have discussed our opportunity with them. The potential franchise applicant wants to make a business plan of our business model, that we do not wish to offer to them or even sell them at such early stages in the sales process?
A potential buyer wants to put together a business plan to get funding to buy a business for which he/she does not have the cash to buy. In order to get a loan, they will need a business plan. But any business plan they put together will be in contradiction to the absolute franchise business model that the franchisor will reveal after the actual purchase, we cannot reveal it sooner otherwise it will be copied and used against our team. I have heard FTC people say that they believe the potential buyer has a right to the information necessary to put together some close representation of a business plan of the franchise they wish to buy to determine if they should buy the business. Whereas this seems like a good idea on the surface the FTC has put into place rules making it impossible. They believe that this type of added disclosure sooner in the buying process will help. Yes it could, but a franchisor cannot provide the information unless first he can substantiate it and second unless the potential franchise buyer can prove he is a real buyer and can afford the franchise. We believe the answer to this concern lies on the back of the potential buyer to fill out a questionnaire truthfully and correctly and for the franchisor to verify data on that application before disseminating any additional information. At that point our company provides for the potential franchisee to go work with an actual franchise for one day and bring a calculator. We can provide a blank spreadsheet with typical expense categories on it but no numbers. The potential buyer in our franchise can visit a current franchisee and bring his/her calculator. And of course the disclosure documents will be provided once the proof of financial capability has been satisfied somewhere in the application process time frame.
It also appears from observation that no one really seems to understand the franchising model outside the actual industry practitioners, attorneys in franchising and those who own franchises. The FTC certainly does not see the whole picture. I would invite Steve Toporoff and/or the entire FTC Franchise Group to go on a paid sabbatical and work in a franchisor’s sales department sometime and listen to real franchise buyers ask questions, competitors trying to get information and the obnoxious looky lou’s. The FTC should also send four or five of its highest-ranking franchise sector employees to do the same. I think if that were done you would begin to understand the ridiculous nature of enacting such a revised disclosure rule and you might ask yourself why we have a franchise rule in the first place.
But the FTC is not the only organization that does not understand franchising. I spoke at the SBDC’s Annual Conference in San Diego, CA a few years back. In the workshop on franchising I had about 50 directors from around the country from the SBDC bombard me with questions after giving my talk. I was dumbfounded by the lack of understanding and knowledge on franchising. Almost to the point of frustration and wanting to walk out, I was shocked these were the directors of some of the largest SBDC offices in the country. I carefully worded my answers to make sure they had understood the issues presented to them. Finally we made some headway and many stayed afterwards to continue the conversation because they knew franchising was a major issue with their clients who come in for counseling usually prior to getting an SBA loan or putting together a business plan for a franchised business. I got to thinking about the 550 or so Directors and Executive Management of the SBDC Annual Conference that were in attendance and wondered why weren’t all the participants in our workshop? Instead many had gone to time slot competing workshops as that is generally how such conferences are set up. But what could be more important than franchising which accounts for 1/3 of every consumer dollar in the country and a huge chuck of the small businesses in the US. What other business model can claim 350,000 outlets would the SBDC; “Small Business” Development Centers Deal with? After all franchising is the largest sector in small business, not to mention accounts for the most efficient small business models. Executives of the SBDC should have training in franchising as compulsory.
FTC should be helping all potential consumers of a franchise to understand what franchising is, but look at the information put out by the FTC, all they do is call to attention all the possible frauds and tell consumers to watch out, just look at their web site. You would think every franchisor is a crook. We all know crooks do not last long in franchising, it just costs too much to even get started, crooks are looking for easy kills with little work. You will find nothing of the sort in the franchising industry. I think the FTC’s tact is a travesty, because some people will lose all their money if they start a small business, franchisors require structure and help people realize their American Dream. You would think that the FTC would applaud such efforts. Instead the FTC purports that the franchisors are fraudulent at every corner, bull! Fact is that the FTC is grandstanding and purporting their own importance to the consumer, offering hundreds of questions that potential buyers should ask of franchisors before purchasing and then making rules prohibiting the answers of the exact questions they recommend to ask through their own rules associated with disclosure. I cannot vouch for the current people of the franchise group but in the Clinton years it was certainly like this. I see a couple of familiar names still associated with the franchise division there, have things really changed? If so shouldn’t we be able to tell from the FTC website. In case anyone has not yet got the picture, Franchising Mean Jobs. Jobs are good. Franchising is therefore good and we ought to make a note of it. With giant happy face right smack on the FTC site. Franchising Industry receives award !!! If you need a spokesman, no one believes that more than this kid right here.
The SBDC has hundreds of sample business plans on file to help potential small business owners develop business plans. But none are sample business plans for a franchise. I have in my personal business library, which travels with me ten books on how to write a business plan. None of them have a sample business plan for a franchise business. It is not taught in schools including the curriculum at the Entrepreneurial Studies at USC. I know because I talked with some professors there and then bought all the text books for the classes. Only one or two schools teach the compilation of a franchisee business plan in their entrepreneurial studies courses and then they simply mention it. This is in the whole country, why? Because it is not getting the juice for the most excellent business format and model it is. The FTC should led the field in this regard to alert the public to that fact. Our company has just devised a “fill in the blank business plan,” which we may use to help qualified franchisee buyers. The franchise buyer can call up existing franchisees and decide what numbers should be put into the plan. These are what the franchise buyer really needs, but of course not until they are qualified.
The early disclosure debate for reasons of making a business plan of a possible franchised business does not hold water. Even once the potential buyer of a franchise has the UFOC there are no sample franchised business plans available in most franchise companies. In any franchise the potential buyer must fill out a form and prove financially capable before such information can be given out. In some registration states this would be considered advertising and be subject for review and once reviewed this would go into public record and therefore it cannot be used at all since it would be pre-signing of agreement. The franchisee does not need a disclosure documents prior to the qualifying, nor should a franchisor be required to give it out. If a franchise buyer makes a business plan or spread sheet for a possible future franchise it will surely be incorrect because the franchise buyer does not know the ins and outs of the franchised business yet. Therefore the franchise buyer maybe leading himself into a falsehood of how he believes the franchised business works and what his new franchised business and new lifestyle might entail. In other words he will be fraudulently inducing himself to buy something on bad information, if the franchise buyer were to show this to a franchisor, the franchisor is not allowed to comment for fear it might be construed as an earnings claim as you probably guessed.
We have had many recent potential buyers ask us for the UFOC so they could write a business plan before accurately filling out the application, or before we had a chance to verify what they filled out as being true and correct. This is not a good argument from the potential buyer, FTC or franchisee attorney. First you must qualify and be verified before we give out data for any purpose including writing a business plan for a franchised business. After all you could be a student doing a project and the business plan you write could appear in the next years text book for the publish or perish professor. It could end up on the Internet, which is what happened to one of ours that was written by a prospective franchisee in Little Rock, AR after a counselor of the SBDC felt was her duty thus disclosing proprietary information of our system to all. Thank god it was written by a prospective franchisee and was actually not correct entirely otherwise that would be copyright infringement, which we as franchisors claim on all proprietary information. It does a disservice to the hard work of many franchisees and the franchisor himself to give out such data or make it available to the public in anyway. It also invites competition to the franchisees thus inadvertently gives a competitive advantage to those consumer who have already purchased franchises trying to get a fair and reasonable ROI to feed families, buy soccer shoes and send kids to college. This is another reason why UFOCs and other information should not be allowed to pre-qualified individuals, the information they create as a business plan ends up all over the place. What if the potential buyer builds a business plan based on UFOC data and then starts their own business, deciding not to buy the franchise? The FTC would say that is their right and so it is, however my franchisees would be totally upset that I allowed data to help a future competitor of theirs into their market. I have a responsibility to that consumer too. He is a real consumer, he is a current franchisee and it is franchisors job to see that they are able to achieve up to their ability to follow the system.
Since a business plan is not necessary until you are sure you want a franchise and are qualified and accepted by the franchisor as a qualified franchise buyer, the business plan debate and justification for an early disclosure is invalid. There is sufficient competition in franchising and a potential franchise buyer, who on average I am told by FranchiseOpportunities.com, looks into 15 or more franchises before deciding which one is most suited to their lifestyle, needs for cash flow and amount of financial where with all available. So therefore we can see that until they narrow their selection, there is no need for them to have fifteen UFOCs to make fifteen business plans, which no one would ever do who was not a doctorial student of business, that is not even required for the IFA, Franchise Executive certification program. And alas the doctorial student would not be a real buyer anyway so no franchisor should be obligated to give them such information based on this business plan debate. Now if the potential franchise buyer had accurate and comparable information then of course this business plan point could be valid. Not actually a business plan as much as a “T” on apiece of legal paper of the pluses and minuses of each franchise being considered. A person not familiar with UFOCs like most all real franchise buyers would have a problem going through all the information trying to find the comparable data. And by then his coffee table next to the couch would buckle from the weight of 15 UFOCs when the house cat sat on it, just ask Robin Glen Day, franchise attorney and cat lover out of California. Check out her cat on her website, how cool is that, not bad for an attorney, Google her name you can find the site?
The SBA is another organization that does not understand franchising. You may recall a few years ago the SBA contracted with FranNet to put all UFOCs on the Internet for streamlining SBA loans of their preferred lenders. First thing FranNet did was send a sales letter to all franchisors telling them they could now get other franchisor’s and competitor’s UFOCs for a fee. In addition they went through all the UFOCs submitted and did studies you could buy too. This illustrates my point regarding the competitive intelligence and proprietary information being given away due to the lack of understanding of the competition in franchising and different market sectors were the franchisors operate and compete. Obviously FranNet with their coup from the SBA contract would never offer such a service if it were not a desire of the competitive market place to get the information. Yes, I ordered my competitions documents and yes it helps me beat them in the market place. Yes it is unfair, but they are also doing it to me. No, we did not after that point bother dealing with the SBA or FranNet. And yes we turn away most applicants who answer our question of “where will you get the money to buy this franchise?” on our questionnaire; “from a small business or SBA loan.” As soon as the franchise buyer submits the documents as part of the loan package there is a possibility of it becoming public record. The UFOCs contain so much information, such a P and L, Balance Sheet, experience, number of projected units, location of existing units, etc, etc that it is in essence the same or better than going through a competitor’s office files or trash. This over disclosure promotes Machiavellian tendencies from competition and condemns the noblest of franchisors to spend to guard against it. We did a had a preferred SBA lender forward information about our franchise to a friend of his from the Rotary Club who was a strong competitor and owned a carwash in that region. The competitor then contacted us for more information about what we were doing.
Apparently the FTC, SBA, and SBDC do not understand the competitive nature of business in America and freely help competitors under the guise of helping consumers. Whether or not they realize it, I believe they must, as only an idiot would be so blind to the fact. Many times the competitor turns out to be the actual agency or organization. Franchisors must be careful to not give away proprietary information otherwise it is of detriment to their system and could hurt the very franchisees they have enlisted under their wings. These current franchisees and I cannot emphasize this enough are also consumers. They are real consumers, unlike those inquiries, which are un-financially qualified and/or competitors. Think about it.