When speaking to a perspective candidate, we recommend that you request a copy of the Franchise Disclosure Document after the introductory call. To help you use your time in the most efficient manner, here are the top 3 three items to target when reviewing the document.

The Franchisor’s Corporate Financial Statements

In the Table of Contents of the FDD, you will find an exhibit that has the franchisor’s balance and income statements for their corporation. The International Franchise Association (IFA) recommends an acceptable balance sheet ratio of 2:1 of total assets to total liabilities. For example, if the assets are $1M, then the liabilities cannot exceed $500K, in order to meet this guideline. With the income statement review, the ratios are even more prudent. The IFA recommends a 3:1 ratio of revenue to all line-itemed expenses. For example if the franchisor’s top line sales are $3M, the expenses should not exceed $1M. We also like to analyze the cash equivalents at the beginning of the year and compare them to the year-end figures and see how these numbers are trending.

Item 20—Number of Outlets

After reviewing the corporate financials, we target the number of outlets the franchisor has at the end of the three previous years. If the outlets are increasing positively in 2013, then this figure should correlate positively to royalty payment in the income statement for 2013. If the franchisor is losing franchisees every year, and it exceeds more than 5%, you will need to find out from the franchisor why the numbers are deteriorating. Typically, you will see weaker royalty payments, as the number of outlets decreases yearly.

Item 19—Financial Performance Representation

This item is often referred to the “earnings claims” and it is much easier to complete due diligence if this information is published in the FDD. We recommend that you read all the details in this item thoroughly and have the franchisor go over this item in fine detail. When comparing one franchise company with another, in the same segment, we recommend that you complete a side-by-side comparison and analyze these 3 items first so that you do not waste endless time going through this large document.

Completing due diligence is time consuming but very necessary when purchasing a franchise. There are several additional items you will need to focus on but these three items will “weed out” the weaker brands in the initial stages of your search, as franchise consultants, we can help you with this process.