This article by Tom Spadea was featured in the February issue of Franchise Dictionary Magazine.
It’s that time of year again when most franchisors are starting to finalize their FDD and think about how to show their 2020 unit level results in their Item 19. I have been asked this question by enough clients over the last few months that I thought it made sense to share our perspective. For starters, Covid-19 didn’t impact franchisors equally. In fact, a few of our clients had their best year ever. However, for many retail, quick-service and restaurant brands 2020 was a very difficult year.
Many asked if they should just forgo including an Item 19 since the numbers were so bad and not representative of where they expect the brand to be in a post-Covid-19 world. I think that would be a mistake. I strongly believe that the default position of all franchisors should be more disclosure not less, and not having an Item 19 is a detriment to development, and a future litigation risk. It’s just not believable to most people that a salesperson won’t talk about numbers. If you have an Item 19, you give your sales folks guidance and boundaries of what they can and can’t talk about in terms of the financial performance of your system.
That being said, to just pull out the old numbers and put in the 2020 numbers won’t tell the story of your brand, what happened through the pandemic, and where you expect the business to be going forward. My suggestion is to think about what you would want to tell your prospects if there were no rules about Item 19. How would you explain the historical numbers, the drop (or increase) in revenue and the pre-pandemic normal numbers? Get that on paper and work with your franchise attorney to make your Item 19 disclosure legally tell the tale.
Think of it like a zero-based budgeting approach, where you don’t just do what you did before but start from scratch and build up. It is something I am sure many of you have thought of doing before but just never got to it. Use the pandemic excuse to attack your Item 19 with a fresh set of eyes. I would break it down as much as your data allows – by quarter or even by month, so you can show the impact and then compare those breakdowns to the same periods in 2019. While some may have weathered the Covid-19 storm better than others, as the end of the pandemic approaches, plenty of prospects will be more interested in how you fared in normal times.