Franchising: Showing Financials to Prospective Franchisees

Do I need to show my financials to prospective franchisees?  The topic of “financials” often creates confusion to just about anyone, and unavoidably, the franchise industry is not free from this mystification. To understand the role of financials in franchising, we need to understand a bit of background information.

An Entity is Born

When you begin the process to franchise, one of our first steps will be to create a separate “entity” which will be responsible for all your franchising activity. This new franchising company “entity” is separate from your existing business. In fact, your existing business now becomes an affiliate (or company-owned business) of the franchising company.

Next, with this explanation in mind, let’s analyze the franchising requirements regarding financials. The requirement is to show prospective franchisees the financial statements of your franchising company (that’s right, the entity that you created at the beginning of the franchise development process).

The important point here is that you want to show these prospective franchisees that your franchising company has the financial strength to support franchising efforts. You want them to see that you can support and train them to get their franchise location launched, without taking into account any money that you would collect from them at the onset (i.e. a franchise fee).

Show Me The Money!

Okay, so now you are probably thinking “What money?!” After all, you just created your franchising company; it has no value! No need to worry. As part of the franchise development process, when the time comes, we will tell you when to “fund” your franchising company. This means that at some point you will deposit money into your franchising company’s bank account, thus showing value and financial strength. Voila! Now you have financials to show!

Note: “Showing financials” is not to be confused with a Financial Performance Representation (FPR) that you may make down the road to prospective franchisees. We’ll discuss that at another time.

After reading this, your next question might be “How much do I need to fund my franchising company?” If so, then give us a call and talk to Dave!  At The Franchise Maker, we take the time with our clients to explain everything along the way, so all these details are completely understood.  No mysteries, no hidden surprises!