What FRANdata Thinks

The New World of Franchise Information

October 9th, 2015 by Sunny Jay Sabuero

If it’s on the internet, it must be true.  While we chuckle at that statement, we also know the dark side that the internet exposes.  There is much more misinformation than information floating around the franchise universe.  While it is easy to disregard the misinformation for what it is, it is hard to do so when you are a protecting the integrity and image of a brand.  I’ll describe what is going on and, by way of example, show a way to take control of information.

First, let’s understand the problem in the context of current events.  On the consumer level we use search tools to quickly determine who provides a local product or service.  Then we take it further by checking any number of third party sources for ratings on the quality of the product or service.  With such conditioning, is it any wonder the same approach is rapidly being adopted for prospective franchisees, whether considering “how much can I make”, the likelihood of success with a franchise brand, franchisor performance relative to franchisees, or the ease of obtaining financing?  After all, it’s not just franchisees that are researching a brand; lenders are too.

This raises two important issues:  Information accuracy and information security.  While franchisor websites are actively used as a reference tool, prospective franchisees use the behavior patterns formed from their consumer experiences and seek third party validation.  Where do they go?  Any number of websites purport to have reliable information on franchising, often from people with an ax to grind.  As we all know, there is no independent go-to source for such information this is accurate, objective and reliable.  There are plenty of places to go to get biased information, often under the guise of being reliable.

Part of the problem is we have many websites that don’t rely on information at all; rather they serve as a rumor/gossip center.  While sometimes making interesting reading, their foundation is built on opinion formed around minimal or distorted facts.  The problem is exacerbated by having a standard regulatory document, the FDD, that is used by many third party assessors and prospective franchisees themselves in ways it wasn’t designed to be used.  We have spent 25 years evaluating FDDS, gathering additional franchise information, and evaluating all of it.  I continue to be surprised at how often someone will take information from an FDD and misinterpret it or use it out of context for whatever point he/she is trying to make.

The solution to the information accuracy issue starts with having commonly accepted definitions for specific terms:  success, failure, and area developer are examples.  Next comes a consistent way of measuring them.  Continuity rate evolved from the need to measure year over year stability across brands.  The other component of information accuracy is trusting the source for such information.  Most websites and a rising number of “franchise experts” are producing information about brands.  Are they accurate?  Does the expert have a bias?  Most do not and we need to find ways of helping prospective franchisees understand this so their reliance on such sources doesn’t lead them to the wrong conclusions.

Next comes information security.  Here this issues is using information that is not in the public domain for specialized purposes.  The whole purpose of the FTC Rule is to help protect prospective franchisees from misinformation.  An FDD is provided to a franchisee prospect in a prescribed manner.   Yet it fails to provide a prospect with the information they really are seeking, starting with the financial results of a franchised unit.  Financial information in Item 19 disclosures aren’t mandatory.  When used the rules are mostly about what franchisors can’t disclose and that’s likely to get worse.  The state regulators are considering changes that would prevent franchisors from using company unit information, even when no franchise unit information is available.

I think the foundation of a solution is being demonstrated by the Franchise Registry.  The Franchise Registry’s purpose is to help franchisees get funding and it does so by making underwriting information that lenders seek available to them.  It does so through four main services:  SBA affiliation services, franchise brand information of interest to lenders seeking brands with specific characteristics, Bank Credit Reports, and FUND Reports.

Some of the information is confidential information provided by franchisors that addresses topics outside the constraints of FDD rules.  Some of the information is proprietary information from FRANdata.  All of it is designed for lenders only to help them make better franchise credit decisions.  And all of it is secured behind a password-protected website that only lenders can access.  Importantly, the site provides real-time information back to franchisors about lending activity with their brand while creating a way for lenders to have direct communications with brands.

What can we learn from this example?  All of the information that is accessed on the Franchise Registry is standardized, defined, and consistent with a clear line of communication available between the franchisor and the lender.  Further, all of the information is accepted by both parties as being accurately and objectively produced by the trusted third party.

The key difference is that the Franchise Registry does not give access to prospective franchisees.  How can franchisors solve prospective franchisee needs while working around regulatory limitations?  Standardizing terminology and using a trusted third party validator would be a good start.

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