This past weekend, sandwich lovers and franchise industry folks alike were struck by a report from the New York Times that described how the structure of sandwich franchise Subway allows franchisees with authority to target others for closure or takeover. It’s a fascinating read about a dangerous culture of conflict of interest that helped a restaurant chain become the largest franchise in the world. Aside from the suggested flaws in its management system, there is another area of Subway’s protocol that is also a potential stumbling block, namely its opacity when talking about its financials. According to the Times’ report, the company’s franchise disclosure document, or FDD—a document every franchise must produce, containing company information and a franchise contract—is more than 600 pages long and gives Subway license to change its rules whenever it sees fit. When I inspected the company's most recent FDD, I found that it offers virtually no data on how much money a person might be able to make should they buy a Subway franchise. Financial data will only be provided for a specific location to a prospective buyer contemplating buying that location.* It also notes that Subway does not authorize employees or representatives to talk about how much money can or can’t be made by owning a Subway restaurant, orally or in writing. **Subway spokesperson Kevin Kane told Forbes that prospective franchisees do have an avenue to learn about the financial returns of Subway restaurants by "reaching out to existing owners to learn about their experience operating a Subway restaurant. Existing owners may elect to share financial information for their restaurant." Subway is a private firm and not legally under any obligation to go to great lengths to pull the curtain back on its financials. But in its secrecy it has fallen out of step with other franchises in the industry that have increased the amount of data they provide prospective franchisees. The result is that potential franchisees come to trust these more transparent brands, and that makes them more likely to buy in. Studies Show Subway Is On The Wrong Side Of Trends A study of 1,905 franchise systems by franchise industry intel firm Franchise Grade discovered that between the years 2010 and 2016 the 870 systems that did not disclose financial performance information in their FDDs saw their number of locations reduce by 0.2%. The 652 franchise systems that did provide financial details experienced an increase of more than 13%. There were also 383 franchisors that provided some metric of expense data—like gross margins or earnings—and those systems grew their location counts by 18.4% during those six years. The correlation between financial disclosures and growth has not gone unnoticed by franchisors, and brands have become more transparent to appear more trustworthy to investors. According to a 2017 report from industry market research firm FRANdata, looking at 3,000 different brands, the number of franchisors that included detailed financial info in their FDDs grew by 52% between 2014 and 2016. The report also found that a vast majority of franchisees (92%) say that having this data makes them feel more informed and better able to decide whether to invest in a brand. When Forbes compiled its list of Best & Worst Franchises To Buy, 2019, we discovered that the top brands all provided detailed financial information that would allow franchisees a picture of how much money they might make if they buy in. Easier On The Franchisee Then there is the impact transparency has on the ability of a franchisee to borrow money to invest in starting up a franchise location. FRANdata’s report found that 97% of lenders are more likely to provide capital for franchisees to invest in a franchise if that brand discloses financial performance information. The reason is that transparency and positive numbers comprise about 20% of a lender’s assessment of whether a brand is a risky investment. Low-risk franchises allow franchisees to secure fixed-rate financing and lower equity payments. If Subway’s financial disclosures are considered insufficient by prospective franchisees, it’s very possible that it is shooting itself in the toe in terms of system growth. That’s not a small matter for a brand that’s shrunk by more than 2,300 locations over the past three years in the U.S. alone. Franchisees want to invest in systems they feel they can trust, and transparency is the best path to building that trust between brand and potential investor. Subway may have to change in order to build that kind of trust, especially in the wake of this weekend’s revelations. *sentence added 1:58 p.m. 7/2/2019 **sentence added 10:01 p.m. 7/2/2019
• 01 Jul, 2019
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