Interested in the possibility of a home-based travel franchise? Get familiar with reading financial disclosure documents (FDDs) from franchisers
FDDs are regulated by the Federal Trade Commission (FTC) and are aimed at providing potential franchisees with information about the franchiser and other franchisees, including potential earnings, litigation, leadership and more.
"There is consistency [in the FDD] because of the fact that it's standardized and regulated by the FTC," said Drew Daly, general manager of network engagement and performance for Dream Vacations, CruiseOne and Cruises Inc. "There is consistency in the information."
Dream Vacations and CruiseOne are both franchises (Cruises Inc. is a host agency; the three brands are owned by parent company World Travel Holdings).
The FDD for Dream Vacations and CruiseOne is more than 200 pages long and filled with information. While Daly said all of the items it contains are important, he recommends potential franchisees pay attention to specific parts to narrow down franchise choices before taking a deeper look.
"That's the way we navigate and try to direct prospects, because there's so much information," he said.
He recommended potential franchisees check whether or not the franchiser has any litigation against it, disclosed in item No. 3. Then, he said, item No. 19 — financial performance representations — is arguably more important.
"As a business that people want to buy and run, they want to know what the economic upswing or downfall is," Daly said.
While franchisers cannot legally make financial claims to a prospect, item No. 19 does give an idea of franchisees' sales numbers. For instance, 9% of Dream Vacations or CruiseOne outlets had average total sales of around $1.6 million in 2017, the highest of five group sales totals disclosed; group one, nearly 40% of franchisees, had average sales of $40,489. The FDD also breaks down how many group members exceeded average sales for their group and more.
"We cannot say, 'You're going to make X, Y or Z your first year' or 'You're going to make X, Y and Z in your first two months.' Legally, we can't do it," Daly said. "But what we can do is provide them with financial performance representation that can paint the picture of success."
Daly also directs potential franchisees to look at item Nos. 5 and 6, which disclose initial franchise fees and reoccurring fees. He also recommended looking at required training.
"All the items are important," he said, "but when I think of someone coming into this business, I want them to be hyperaware of what it's going to take for them to invest in order to be successful."
Daly also recommended potential franchisees review FDDs with a professional before making a commitment.
"We always encourage and strongly recommend anybody to consult [someone], whether an accountant, a business manager or a lawyer, just to make sure that the path they're on is the path they're going to be successful with," he said.