Franchisee Profit and Loss Information: Where Is It?

Every franchise agreement provides that the franchisor will have the right to review financial and other information of the franchisee, as part of its policing rights in the context of being the franchisor and as part of its control prerogatives as the owner of the name and other Intellectual Property which might be deemed abandoned if control were not exercised. Similarly, every franchise agreement calls for the submission of annual federal tax returns to the franchisor within a stated time following the close of the franchisee’s year. It cannot be disputed, therefore, that system financial performance information is not difficult to obtain.

Every franchise agreement also provides to the franchisor the right to prescribe formats and systems for information reporting and tracking, including the imposition of uniform accounting methods. This enables direct measurement and comparison of franchisee financial performance.

Those items in any financial statement that can be treated differently according to the franchisee’s tax and financial planning agenda can all come after the accounting for all direct expenses of operations. In this system, all direct expenses are dealt with as direct deductible expenses, and all GS&A is defined to exclude items that are “personal” – like cars, planes and boats. Owner’s compensation, regardless of the form it takes (salary, fees, profit distribution) is treated as part of “profit”.

The objective is to calculate what it costs to be a franchisee of this system and the resulting profits, if any, that are available to the franchisees year by year. The population can be broken down in the statistical analysis of system performance to reflect such things as seasonality, regionality and length of time in business. Each franchise unit is treated as a separate business. Multi unit operators divide corporate level GS&A amongst their stores according to unit volume.

There may be some other tune up issues in this, but what I am describing would permit profitability comparisons – which is why no one wants to do it.

The most profitable chain would sell more franchises easily, and the bozos would instantly be revealed for what they are. Implementation of this system would make Item 19 very useful. It would also make profit and loss misrepresentation by salespeople nigh impossible.( I know there will always be some Bozos who will still not figure it out). It would work to the detriment of any new franchise, but the new franchises are far more risky and where the biggest incidence of fraud is to be found. It would make it extremely difficult to sell a new franchise on sales pitch profitability claims (again, except to Bozos).

This obviously valuable to franchise investors procedure requirement will become law when pigs fly. It might be otherwise if franchisees were militant instead of simply chatty.