People considering any franchise oppor-
tunity should ask the franchisor and
current franchisees about the company's
cost-cutting initiatives that directly relate to
franchisees and what efforts they've made
to ensure franchisees are well-capitalized
for start-up and economic ups and downs.
Franchise executives toldus that franchisees
in the low-cost franchise sector are more
likely to be undercapitalized. This is whywe
urge you to carefully consider the financial
documents within the franchise disclosure
documents (FDD) and talk to existing
franchisees about what you should
realistically expect in terms of how long it
takes tobe profitable.
Item 7 in the FDD can help prospective
franchisees make sure their franchisor is
realistic and upfront about expenses
involved in the business, but all Item 7s are
not equal. Some franchises outline the
necessary working capital, but others - who
might want to keep the stated investment
level as low as possible—don't. Any investor
should understand and plan for the fact that
it might cost three to four times more to
actually run the franchise business, as
compared to the financial estimates listed in
the Item7of the franchise company's FDD.
Where possible, all potential franchisees
should also thoroughly review and
understand a company's Item 19, if
included, so they have a better idea of what
to expect in the way of gross revenues and
profitability. Not all franchise companies
provide an Item 19 as part of their FDD
because it's not required, and, like the Item
7, every Item19 is different. It is critical that
you truly understand what you're looking at
within the Item 19. It's up to the franchisor
how detailed they get or which franchisees'
financial information they include, so you
want to make sure that you're looking at a
good representation of all the franchisees
andwhat they earn and spend.
In general, low-cost franchise opportunities
mean lower risk, and for most franchisees,
that's the biggest pro of starting a low-cost
102 | BusinessWorld | August-September 2014
