It’s been one year since I purchased and have been the franchisor of the Monkey Bizness concept. One of the biggest benefits I have seen from this venture is that I get to network with many other aspiring entrepreneurs not just about franchising with us, but about what their ambitions and goals are.
Inevitably, one focus of this conversation is money. In the franchising world, this conversation often starts with the FDD’s Item 19, Financial Performance Representations. As a certified public accountant, this is right in my wheel house, but I often cringe when I hear how much reliance is put on these numbers. In full disclosure, Monkey Bizness did not list figures in Item 19 this year due to not owning the company for the full year in 2015.
The reason I cringe at the over reliance on this is how one of our competitors presents their Item 19. First, they give you the average sales per unit for all of their stores, approximately $560,000. Then, they list their average sales for California and the Northeast Region. These two areas represent approximately 36% of their stores, but 46% of their total sales. So, if you aren’t lucky enough to live in this 7-state region, your actual average sales are approximately $474,000.
The above example doesn’t even go into the fact there are also approximately 2 pages of disclosures to summarize the data in these supposedly straight-forward 3 tables. Nor does it relay the fact that you are given an average of store sales that could be wildly different depending on whether you live in Washington or Texas. There are a lot more questions, but this is a blog post so I need to be somewhat concise….
While this is all perfectly fair and ethical (after all, they do disclose what is actually in the tables), this leads to a bigger point. While some franchise systems’ Item 19 is pretty straight-forward, more often times than not you end up trying to comprehend what is actually being disclosed. I am a CPA, and even I get lost in the facts and figures sometimes. While Item 19 is important, the most imperative analysis is done by you, the prospective franchisee.
This sort of financial analysis often takes the form of a “model”, which is a fancy word for projected financial statements. A CPA or financial advisor can often help you to build your model. But the most important step in building your model is determined by your assumptions. For our business, those major assumptions include the number of birthday parties, the number of open play visitors, rent, etc. These assumptions will vary depending on the geographic location and the demographics in your area. This will often give you the clearest sense of how much money you can make in the business.
Monkey Bizness has produced a model template for you to begin with that can be downloaded here. The model can be updated for your assumptions, that are specific to your given market. It is meant to be a starting point, not an ending point. We would love to talk more with you about franchising and Item 19 specifically. You can reach out to us here.