What is a Franchisor Affiliate? And How is it Scored?
How does an affiliate's financials get considered when calculating the Franchise Signal disclosure score?
First we have to backup to when a business decides it wants to franchise...
Take for example a turf company.
The business does well and grows over multiple years. Perhaps they open a second location.
(For context, this is *hard* - any business owner can attest to what it takes to start, grow, and sustain any business).
Instead of opening another location, hiring, and running the business themselves, however, they recruit franchisees.
As a franchisee, you front the initial fee and investment. You sign a specific term length contract (that may come with a liquidated damage clause). You agree to pay some tier and schedule of royalties. In return, you are given a system to run.
As a part of diligence, it is your responsibility to understand how well you can start and run this system and whatever it entails.
One question you may have:
"If the system is so proven and profitable - why is the company franchising instead of expanding, hiring, and investing in the business themselves?"
And secondly:
"How repeatable and profitable is the playbook or system among franchisees who have started this business before me?"
Hence, the diligence process starts and Item 19 of an FDD for the financial performance is often the first section that gets reviewed.
One diligence consideration looking at Item 19 financials, is when there is limited data for other franchisees who have run the system, and instead a focus on the original location(s) (the affiliate).
After the first year or cohort of franchisees have opened, why might a franchisor choose not to disclose any or all franchisee performance?
Taken one step further, are the affiliate location(s) that may be presented the same size (square footage, population, and/or territory) as the franchise locations being offered? Are all other factors the same?
When calculating the Franchise Signal disclosure score, we specifically exclude affiliate locations (from both the numerator and denominator).As a result, affiliate locations have no bearing on the score.
If 20 franchise units and 2 affiliates operated during the year and 19 franchise units were disclosed, this would be a 95% disclosure score (19/20, the affiliates are excluded).
An example score with an affiliate also presented in Item 19 is shown above.
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It is important to note that nothing on this site is investment or legal advice. This site does not constitute full diligence in any way. You should reference the FDD(s) of any brand you are looking at. Franchise Signal may make mistakes. If you are actively considering investing in a franchise you should consult with a franchise attorney.
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