Buyer beware - are you seeing the whole picture?

The advertisement, for the American Freight furniture, mattress and appliance retail franchise, suggested that the company was achieving just over US$1 million average net income per store. However, a footnote explained that, ‘This information reflects the Average Gross Sales and Average Net Income for American Freight company-owned retail businesses which were open for more than a year as of fiscal year end 2021 and had annual gross sales of at least $4,500,000. Of these 20 retail businesses...’ In other words, less than 10 percent (20 ÷ 250) of the company’s 250 locations in the USA were achieving the $1 million-plus turnover.

The owner of American Freight is Franchise Group Inc,  a publicly-traded holding company listed on the NASDAQ that acquires and manages mainly franchise companies. The advert was posted on LinkedIn by US franchise advisor Patrick Findaro who pointed out that the midpoint investment was just US $734,000 and asked, ‘How can this be true with a midpoint investment of just $734k? You scale up the business and you get your money back and some every year? He went on to ask the question, ‘Would you present financial information in the same way to your investors and Wall Street?’ The post was also commented on by a number of highly-regarded US franchise professionals.

The USA has one of the most highly-regulated franchise sectors in the world yet, while the advert no doubt complies with US law via its small-print provisions, it does highlight the necessity for franchise buyers to take proper legal and financial advice before investing. 

Although the American Freight franchise does not operate in New Zealand, the case is a valuable example which points to the need for franchise buyers to carry out proper due diligence and investigate claims made before committing themselves. Here are some resources to help:

250 Questions to Ask Your Franchisor 

Why Use an Accountant? 

Will It Make Money? 

Why Use a Lawyer? 

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