From A to Franchisee: The Podcast for Smarter Franchise Buying

Understanding the Franchise Disclosure Document (FDD)

• Franchise Business Review • Season 1 • Episode 10

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Host: Michelle Rowan, President and COO of Franchise Business Review

Guest: Tom Spadea, Franchise Attorney of Spadea Lignana LLC

Episode Summary

In this insightful episode, Michelle Rowan and franchise attorney Tom Spadea delve into the intricacies of the Franchise Disclosure Document (FDD). They explore its critical components, such as litigation history, initial fees, and financial performance representations, offering valuable advice for prospective franchisees. Tom shares his journey into franchising, emphasizing the importance of understanding both the franchisor's and franchisee's roles. The conversation highlights the significance of due diligence, financial planning, and the relationship dynamics within franchising, providing listeners with essential guidance for making informed decisions in the franchise world.

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Michelle Rowan (00:53)
Thank you for joining us today. We are going to be talking about the franchise disclosure document today on our episode. We've mentioned it in other topics, and today is the day we are going to go a lot deeper. I am joined today by Tom Spadea He is a franchise attorney and co-founder of Spadea Lignana Franchise Attorneys, a leading US franchise law firm. He's provided legal counsel for hundreds of franchise launches.

and guided dozens of franchisors through successful private equity transactions and strategic exits. Tom's extensive background includes over 15 years of entrepreneurial and executive experience within the franchise industry, providing him with practical insights into the operational and strategic challenges that franchisors face. He holds a certified franchise executive designation.

from the International Franchise Association and has been recognized as a legal eagle by Franchise Times and a top franchise influencer by 1851 franchise multiple years consecutively. Thank you so much for joining us today, Tom, to dig into the FDD. Yeah, I'm excited. We started before we recorded just saying we've known each other for a long time, but haven't talked to each other in a while, so this will be very fun.

Tom Spadea (02:10)
Yeah,

that's good.

Michelle Rowan (02:13)
Okay, so I want to start with what drew you to the legal aspects of franchising. Tell us your story of how you ended up doing all the work within the franchise industry.

Tom Spadea (02:22)
Yeah, I mean, I love franchising. It's been a blessing for me and I've got to work with so many wonderful people on the franchisee side, the franchisor side. You know, I got into it like a lot of things in life. You sort of get into it ⁓ circuitous way, just kind of meandered into franchising. fell into it. ⁓ I grew up in a small business family. My grandfather started a machine shop after World War II.

father ran it. I was sort of always involved in business. I was a finance major. Never thought about law school and never thought about franchising, right? When I was going through, I had a business. I was partners in a business in my twenties. It wasn't a franchise. It was an independent manufacturing company. Like a lot of things in the US, the market sort of shifted. 9-11 happened. The whole market changed. So I found myself, in my late twenties at a business that was very successful and kind of went away. And so I started doing business brokerage.

I started helping people buy and sell businesses, thinking I would be in manufacturing businesses and found out that they had the same troubles that our family businesses had. And so I got turned on to franchising and I actually became a franchise broker for a bit. And so was helping people transition into franchising and it was like a light bulb went off in my head that all the energy and I was always good at relationships and I understood finance and I understood business, but I was by myself. And franchising really spoke to me thinking, boy, when I was

younger, if I had been in a franchise and put the same energy and effort into the independent business, I probably would have got a lot of great success. So I had a couple years and then I found the law because there were just a lot of lawyers that I felt didn't have that kind of bedside matter, the business experience. They were thinking about it more academically as opposed to like what are we going to accomplish. And so I pivoted, I started thinking about law school. God bless my wife, her name should be on my degree actually. I two young kids.

And I entrolled in law school and at the same time I got hired by, I'm out of Philadelphia, Rita's Italian Ice hired me to sell franchises. And so that was my really first, and this is going back in the mid-2000s, my first really formality in the franchising world. And so I sold franchises, I dealt with franchisees, I ran franchise sales, real estate construction, not as a lawyer, as an executive. Got my CFE, got involved in the IFA, and then I graduated and I started my law firm. So now it's been 13 years.

Josh Lignana my best friend from high school, played football in high school together. We've known each other forever. He also went to law school late and we thought, we think we can do kind of a different job in the franchising world. And then the first couple of years, I represented mostly franchisees. I went back to kind of my business brokerage days, the franchise brokerage days, and I was helping people evaluate FDDs, sign leases, start their LLCs and get into that.

We've slowly evolved the firm as you know, over the last few years to now we focus on founders. So the documents we used to read and negotiate and educate people on are now the documents that we write for people who have an independent business that want to become a franchise. And so that's the core focus of our business is really driving and understanding the regulatory stuff and just trying to break down, you know, what that relationship looks like. What's the role of the franchisor?

What's the role of the franchisee? There's a lot of noise out there and I think franchising can be just an unbelievable avenue for independence, wealth creation and yeah, I love it. So that's kind how I kind of fell into the franchising.

Michelle Rowan (05:52)
I love it. So before we even dig into this, I'm just going to comment on a few things. So my dad was an engineer. He passed away a couple of years ago, but he was an engineer. He worked for Harris Graphics for Printing Press, but he ended up becoming a franchisee right at the time he owned a tool and die company, an independent business. There's just a lot of similarities. And then he became a franchisee right as I found Eric Stites and joined FBR. So.

Tom Spadea (06:10)
Yeah?

Michelle Rowan (06:17)
had I known about FDDs, I think I would have been more valuable to him because he actually wasn't part of a great system. So it might have helped me had I known that. So I just love that you both kind of went through that transition of independent business owner and then found your way to franchising. He actually was our survey caller ⁓ after he retired for a few years, which was so fun to be able to just kind of like have him talk to business owners because he loved it too. He loves franchising. ⁓ I also want to just point on this

Tom Spadea (06:25)
⁓ Thank

really cool.

Michelle Rowan (06:46)
topic, I feel like there are franchise related attorneys that are either working for the franchisor or the franchisee. And you talked about, I like that you have the perspective where you've worked with franchisees and you're on the franchisor side because there's, I feel like there's this kind of, ⁓ I wouldn't even say it's an undercurrent, but there's this us versus them that sometimes, especially if attorneys are involved, that starts happening with franchisees and franchisors. One of the things is the FDD tends to be slanted.

towards the franchisor or franchise agreements are slanted towards the franchisor, which I agree with they are because they are protecting and building a system. So I do want to just kind of call that out because I love that you have experience from both perspectives and really these documents are put into place to clarify the roles of both the franchisee and the franchisor and they are in place because we are talking about a systemized process that people are buying into.

I want to just throw that out there. don't know if you have any comments around it, but yeah, good.

Tom Spadea (07:45)
I do. mean, I

think it's a great comment. I think, well, first of all, I come from the philosophy of believing that it's like, it shouldn't be an us against them mentality. It does sometimes break down to that and you shouldn't. But on the flip side, you know, any attorney who's looking at an FDD should really have franchising experience because if you go to just a real estate attorney or an M and A attorney or you're, you know, the divorce attorney or trust, they're not going to understand that when you really think about franchising. So I tell this

Michelle Rowan (07:54)
Yes.

Tom Spadea (08:14)
when I would represent franchisees, it's a different kind of contract. You have to worry about, it's obviously a contract between you and the franchisor from the franchisees perspective, but there's this like third unspoken thing, which is the system itself. And as counterintuitive as this might sound, beware of a weak franchisor because you're investing all this money, all this energy, all this effort into this business.

And the franchisor's role is to protect the brand. And so those rules that you're worried about that are super strict against you, as long as they're written in a proper way, that's not necessarily bad for you. So it's not this zero sum game where it's like a real estate, for instance. Look, real estate, negotiate every single clause, fight about everything. Cause at end of the day, you write the check, the landlord's not helping you run your business. He's just giving you the footprint. Franchising is different. You're kind of...

It's not a partnership. There's certainly the, you know, you're the franchisee, they're the franchisor, but you actually want a strong franchisor you think of really big brands. Those agreements are not negotiable. They're strong. And that doesn't necessarily mean it's bad for the franchisee. they should be looking at, know, what's their franchisee satisfaction. There's a whole host of things that a franchisee that we can get into that should evaluate even outside of the FDD. So you got to think of that three party relationship.

the franchisor, the franchisee, and the brand that's kind of sitting out there that you are investing in as a franchisee. So the strength of a franchise agreement isn't necessarily bad. It shouldn't be us against them.

Michelle Rowan (09:51)
Yeah, I love that. we've had previous episodes where we do encourage them to have a franchise attorney help them through this. Exactly for that reason is that if you do run into a franchisor that is willing to negotiate a lot, that is concerning. This is not like a real estate agreement where there is a lot of negotiating. They should be pretty firm. Yeah.

Tom Spadea (10:10)
Yeah. And it's uniformity,

right? Like there's things. And look, if there's three units and you're the first franchisees, you might have a little bit more headway, but you have to be smart about what you're asking for. Maybe it's renewal fees, maybe it's your territory size, but you shouldn't be monkeying around with the way they're going to run the brand fund or the way they're going to run the business. If you're feeling that you don't like how they're proposing to run the business, well, then maybe there's a different franchise for you to buy. It's probably not going to be a good fit. And that's what you really need to be evaluating.

the words FDD, it's franchise disclosure document. This is a disclosure so that you as a candidate can make an informed decision, but you should really have in your mindset it's a binary decision. You want to be in or you want to be out. These are the rules of

Michelle Rowan (10:52)
Love it. So I was going to ask you to define the FDD because I've done it on past episodes, but I think you just nailed it. So this is the disclosure document that we're going to go through. There are 23 total items that make up a franchise disclosure document, also called the FDD, and that what we want to have you do with us today is we're going to focus on the items that we feel are the most important to consider and understand what you're looking at. So I think we're in agreement of what those items are.

We're just gonna go through them in the order that they appear, if that makes sense.

Tom Spadea (11:22)
Can I also

just frame it for the audience that you also you also have to think about it is that and sometimes people get confused of this and even franchisors who are our clients get confused about this. There's two main pillars. There's the FDD and there's the franchise agreement and sometimes people kind of run out of steam. If you think about it, the franchise agreement itself, that's the contract. That's the lease. That's what binds you to pay the royalties. Now sort of this Venn diagram probably.

Michelle Rowan (11:25)
I would love that.

Tom Spadea (11:52)
you know, a third of what's written in the franchise agreement also appears as a disclosure in the FDD, but the FDD is not the contract. And sometimes people, they run out of steam, they read the FDD, they start the franchise agreement, and then they start thinking, this is the same stuff. I don't need to read it. No, if you ever, you know, that FDD is this picture in time. It burns off. It's like a booster rocket putting the franchise agreement into orbit. Once you sign the franchise agreement,

As far as the the franchisor goes, as far as franchisee goes, that FDD is gone. It has served its purpose to educate you to get in. So when you're reading this, you're truly reading it to learn about what you're about to commit to, but it's not your contract. The contract is the franchise agreement. So framing that, we want to talk about those disclosures and what you can learn to make that decision to evaluate.

Michelle Rowan (12:43)
I love, so that's a great frame. And so the FDD, the franchisor is required to resubmit their FDD each year in registration states. So I have a question for you. don't know if you know the answer to this. Do franchisors, cause I know that document is changing every year. Do they update their existing franchisees on what changes have been made to the FDD? Do franchisees care based on the comment you just made?

Tom Spadea (13:03)
So they're not obligated to. If you're a franchisee and you want to do another unit, you're going to get a new FDD for that year. So you're right. So every year the franchisor has to compile the FDD. And by the way, if you're a franchisee and you sign a franchise agreement, your name is going to appear in item 20 of next year's FDD. I have this map on my wall that kind of shows the different registration states. So the FDD is regulated by the federal government. The federal government says, hey, look.

Michelle Rowan (13:04)
Okay.

Tom Spadea (13:30)
We want people to get all this information, the 23 items, it's going to be 60 to 90 pages of disclosures, and every year you have to update that document. And then a bunch of states say, well, okay, but the federal government is actually not checking that document. So if you're in Pennsylvania, where I live, there's no franchise registration. That FDD is blessed by the franchisor and their attorneys. And so that's another reason that you want to have a franchise attorney look at this, because this has not been approved by a government agency.

So the states, New York, Maryland, California, the regulatory heavy states, they say, well, we want to look at it ourselves. And so they'll make comments and they'll look at it and they'll require the franchisor to update that every year. That's kind of what our trade is, is managing that disclosure process for the franchisor so they can give a document to the franchisee.

Michelle Rowan (14:18)
Yeah, And if you are a candidate going through this process with a team, if that FDD does not make it in time for a deadline, the franchisor is in a state that it's called they've gone dark and they cannot disclose you, they cannot sell to you until that FDD is updated. So I think that's also they might run into that if they're in process with someone and that FDD goes dark, they have to stop.

Tom Spadea (14:37)
If you're

a candidate, the franchise has done anything wrong. You shouldn't flip out. Sometimes people are like, oh my God, the franchise must be this horrible person because they can't actually give me a new document. No, what happens is, say you're in Maryland, you get your new document, you file the document to get updated. There's always going to be a period of time that the old documents now stale because you have a new document and you just have to get the state to approve it. And it could be anywhere from three to 12 weeks waiting for this document to get approved.

Michelle Rowan (14:43)
Yeah.

Tom Spadea (15:05)
and the franchisor can't really keep that process going. So it's not necessarily a red flag just because they've gone dark. So you should just know that that's just part of franchising and just get...

Michelle Rowan (15:16)
That's a great point.

One of my friends, Paul Pickett at Wild Birds, they had it happen this year because the company went from being owned by Jim Carpenter to an ESOP and that threw a lot of time on negotiating that. So I love that. We're just saying it's not a bad thing to go dark, but just know you can't actually write the check and buy in in that period. okay. All right, we're gonna start with item three, the litigation history of the brand.

You are the expert on this, I am not. So tell us what you do with item three.

Tom Spadea (15:45)
Look, if a franchisor has been sued by anything to do, and it's not like just like if they didn't pay, know, Paul Pickett's which I know Paul and I'm sure he would pay his bills, but if he didn't pay his supplier for the bird seed, they might sue him. That's kind of what we would just call like a general commercial lawsuit if an employee sues or you have just kind of a general problem at the corporate. You don't have to disclose that. What you have to disclose is have you been sued by a franchisee for fraud, for something? Were you in a really big fight with your franchisees?

those kind of lawsuits the government, rightfully so, is saying, look, we just want franchisees to know. Now, I believe, because as I said before, it shouldn't be this us against them game, I think a franchisee should look very, very seriously if there's item three disclosures. I'd say the majority of our clients have zero items, three disclosures. They've never been in a lawsuit with franchisees. Now, if it's a brand that has 1,000, 2,000 units, yeah, probably over just the general, statistically, you might have a couple of lawsuits in there.

I think that's okay. But if you have a smaller franchisor and they have three or four of these things in there, that should be a red flag. You should be really understanding. Wait, I mean, I look at franchise lawsuits. It's sort of like, my brother's a pilot, right? So I think about it. says like, know, airline, made this comment to me. When an airline crashes, it's usually there's like 14 things that have to happen wrong in sequence for that to happen. Well, lawsuits are the same way. By the time something ends up at a lawsuit, there were probably 14 things that could have resolved that.

And if it ends up in item three, that means the franchisor probably was super aggressive. And so that should give you pause to at least ask more questions in item three. That's a very important item.

Michelle Rowan (17:20)
Yeah, so franchise, a franchisor

wants to work things out before it lands in their FDD because then they do have to disclose it. So they will work very hard. So a couple of questions. Is there detail of what those lawsuits are or you just have a very limited, here's what the lawsuit name was. So you'd have to go and kind of dig more into it.

Tom Spadea (17:38)
So

it's somewhere in between. It's like a paragraph that you write up and look, I'm writing on behalf of my franchisor clients. So I'm going to color that in the best way possible. They also, the regulators agree. it's probably, it's going to be that paragraph that's written is going to be on the, is the best told story that the franchise or has about that crisis. So, but you're going to have party names and yeah, you might want to go look it up and see what really happened.

Michelle Rowan (17:41)
Okay.

Okay, second question on this, is there a time limit that these...

Tom Spadea (18:07)
Yeah, it's

like, depends on it, but it's 10 years it will drop off. So it'll be sitting in there for 10 years, there's, there's some, yeah. And then there's some other things of like, if it gets settled, there's some rules on that, but basically it's kind of looking back.

Michelle Rowan (18:11)
Okay. So any litigation in the last 10 years, but there's, there's wiggle.

Okay, perfect. Love it. Okay, so next one that we're going to talk about is item five, the initial fees.

Tom Spadea (18:28)
Yeah, so when you're looking at the fees, this is that part of that disclosure. And these are items that, except for some things that are paid to the franchisor, they should be in the franchise agreement, but it's broader. So what happens is if you think about, like if a franchisor says, you know, we're not right now putting in some of these technology fees or these Arctic fees, but we might at some point, they want to start disclosing that. So those initial fees are what you're paying to the franchisor and to their affiliates. And so they're just trying to disclose all these things so you know.

You want to know how the franchise or it makes money. Basically, that's what this is disclosing. So they're in a business and they're making money and you're buying your business. And so you theoretically are going to make more money than them as the profit. You want to know what fees are disclosed. So you are not surprised, right? Like that's when we're, when we would do franchise, if your franchise lawyer should bring you through that, you're not really negotiating that. It's just a disclosure so that there's no surprises. So if you have to hire their architect firm,

and you have to pay that through them, you want to know what that is. You want to know all these fees. If they're kind of collecting a grand opening fee from you, you want to see what those initial fees are to get you in the business.

Michelle Rowan (19:39)
if there's any training fees, those should be listed in there equipment, supplies. I'm trying to think you've mentioned construction. Yeah.

Tom Spadea (19:48)
Yeah, so

like, you know, all those items are kind of go together. They give you this layout and it's sort of weird because they're laid out in a way that if you were like buying a business or doing another thing, you might not lay it out exactly the way they're doing it, but this is prescribed by the government. So these forms that you're seeing are literally the regulations that were originally written in the seventies. And so it's just kind of, it's changed a couple of times, but very minor. But so that's, that's what this is. That's what these.

Michelle Rowan (20:18)
Okay, and following item five is item six, which is other fees. So what kinds of things or what is that section? What are we looking for in there?

Tom Spadea (20:26)
Yeah, so

that's also going to vary depending if you have, a food franchise or if you're buying a service franchise or buying that. you're just trying to, are some of the other fees that you want to know as a franchisee, like technology fees. And they're also going to disclose some of the the increases that are in the franchise agreement. So this is one of those areas where I talked about the Venn diagram and you have some things in the franchise agreement.

So the franchise agreement might put on page 30 of the franchise agreement that, hey, there's a technology fee that's subject to a 10 % increase or maybe they don't say what they say, but it's just subject to whatever our costs are. So then the government says, all right, well, look, we're not going to depend on the franchisee finding that in the fine print on page 30. We're going to write this in plain English. We're going to put it on this chart. So there's any other fees here that you're potentially going to have as a franchisee, not initial, but ongoing.

such as say a technology fee, we just want you to have this visibility that, okay, you got the business open. Three years from now, you get a letter from the franchisor that says, hey, by the way, your technology fee is going up to $2,000 a month and you start complaining and you start getting upset. And they say, well, look on page 30 of your franchise agreement, which by the way, the FDD is not what is enforcing that. The franchise agreement, back to my analogy of the franchise agreement in orbit,

the franchise agreement is enforcing it, but that enforceability is subject to what they disclosed before you made the commitment. So that's what those other fees do.

Michelle Rowan (21:59)
Yeah. And so sometimes there's a marketing or an advertising fee that's in there. That is where the royalty is listed too, isn't it? OK, so that's your ongoing. So if your royalty is 8%, every dollar that comes into your business, 8 cents is going to your franchisor for that royalty. The marketing fees and the technology fees, training fees, anything like that that's ongoing, your franchisor, there's a range of how transparent franchisors are with what they're doing with that fee or what it covers. But again,

just we want to expectations.

Tom Spadea (22:27)
All right. And

this is that where you had said in the beginning that we're trying to think of franchising not as an us against them. So like you have to have empathy as a franchisee. They're not necessarily the enemy here. If you're thinking they're the enemy, it's probably the wrong system. They also have costs. So they might say, hey, we have these costs and we're going to sign a 10-year franchise agreement with you. So we got to do our best case to budget these fees just because they're fees. It doesn't mean they're bad. It's you're buying into a group.

Michelle Rowan (22:35)
Yes.

Tom Spadea (22:57)
So think of it that way. It's kind of like a co-op. so there's fees that the franchisor is going to say, look, it's important that you have this POS fee. It's important that you have this because we need that data. We need that visibility. It's ultimately going to help your business. And so they have to predict what those fees and increases possibly could be ongoing. So that's the challenge from the franchisor.

Michelle Rowan (23:16)
Yeah, yeah.

Okay. Item seven, the initial investment.

Tom Spadea (23:22)
Yeah. So this is one when you're doing, we didn't get into that. will talk a little bit about sort of when you do due diligence and you talk to other franchisees. This is a biggie my best practice when I'm coaching a franchisor and writing these is to try to estimate this as a higher number. Some franchisors try to say, no, we want it to be a lower number, but there's always this pull, push and pull. And so you'll see this range, right? Like if you're opening a store, you don't really know. mean, if you, if you,

Michelle Rowan (23:29)
Yes.

Tom Spadea (23:50)
If you're opening a restaurant and you're taking over a restaurant that closed down, well, it might only cost you 20 grand to get in there instead of going into a white box that's going to cost you 150 grand. So the franchisor is going to put that range. This is basically a best guess of what happened last year and what your information. You should also be cognizant of the fact that we talked about these updates of FDDs. So an FDD that you're reading in August of 2025 was issued in

the spring probably of 2025, but it was using numbers for the stores that were built in 2024. And now you roll over to December. These numbers can be like a little bit stale. So I always advocate to say, look, put this down. And then we had, it was a real challenge over the last couple of years with the inflationary pressure we had that inflation was going up, but these items were, you know, disclosed two years ago. We had a bunch of inflation. So this is something where when you ask franchisees, we get to the

Michelle Rowan (24:36)
Yeah.

Tom Spadea (24:47)
you know, item 20, when you ask franchisees about existing franchisees, what did it cost to build? Ask them the question, how close was the investment to the item seven in the FDD? Was it accurate? Did you feel that what they disclosed to you was an accurate representation of what you ended? And that'll just give you kind of a window in. And the other reason that I tell franchisees, in to be super conservative about this number, is franchisees are going to use this item to get their financing.

And so the bank is going to look at the FDD and say, well, this is what it says it costs to build the store. So if the cost runs over and it's also, you need to do your own research as a franchisee of what you think this cost is going to be by validating, because this is just a disclosure and it's the franchisor's best guess. ⁓ If they're wrong, it's kind of on them, but it's not a get out of jail free card. You have to do your due diligence. This is giving you.

you know, a kind of a look and a window into what they suspect it's going to cost. So as long as they weren't fraudulent, if they had these historical costs and the cost spiked, that's kind of on you as a franchisee to really understand your market. And another example of that, if you're in New York City and all the franchises are open in the middle of Ohio, you're probably going have a lot more costs. It's not wrong for the franchisor to talk about the historical. So you have to come with a little bit of forethought as a

potential business owner and what that's going to cost you.

Michelle Rowan (26:15)
Okay. And so while you were doing this, I decided I was going to jump in. This is a good point. Jump into some of our industry data, because you're touching on some really good topics here. The best franchisors, the best development teams are trying to set realistic expectations with this document. They don't always get it right. So now I have to pull out my calculator. So we have, I'm going to give you some data from our industry benchmark. So we ask it. Yeah. So.

Tom Spadea (26:35)
to all of us.

You promised me not a math problem here. No, I'm kidding.

Michelle Rowan (26:43)
We ask a question, the total investment into my business, including both time and money, has been consistent with what was told to me in the process of choosing my franchise. So again, this is responses from over 30,000 franchisees. We have 57 % of franchisees strongly agree or agree with that statement. 22 % were neutral when we asked that question and 20 % disagreed or strongly disagreed.

So the majority of franchisors are getting this right, but I think you gave some really good pointers on how you suss out how close that was. The other thing too is to just say, hopefully we never have another instance like COVID, but that also threw all of these kind of projections off. So you do need to be aware of what's happening as far as is it harder to get materials? Is it harder to...

get your, or does it take longer to get a physical location built? Those things are going to impact all of the things that it takes for you to get open. So I think you're giving people good advice on how to get to how accurate that is, but it's not a bad idea to just kind of in your head anticipate it's going to be a little higher.

Tom Spadea (27:50)
Yeah,

exactly. Build it in, right? mean, if you've ever like fixed up your house, you're always it's always it always costs more.

Michelle Rowan (27:57)
Yeah, always,

always. Okay, now we're gonna get to the big one. This is big in the franchise space to talk about the item 19. So this is the financial piece that I'm gonna let you explain what it is and why it varies so much as far as what people see there.

Tom Spadea (28:16)
So item 19 is the financial performance representation. This is basically the franchisor that we're talking about, what the unit economics are of the store. But I would caution franchisees to say, so they'll set it up a number of different ways, right? So a lot of times you'll see charts and you'll see like, the top third of our franchisees perform this, the middle third perform this, the bottom third. And of course, every franchisee is always says, oh, I'm only going to be in the top third, so I'm not worried about the others. Of course.

Michelle Rowan (28:44)
That's right.

Tom Spadea (28:46)
But you know statistically that doesn't always check out for someone that's So not always ⁓ So but I would say that and and I I mean my advice to franchisors is to try to keep it very high level I think be wary of the ones that drill down because I think they give a false impression. Look, this is your business You're buying you're renting a business model from the franchisor and you're getting a window into what others have done with that business model different cities

Michelle Rowan (28:48)
Not always.

Tom Spadea (29:14)
different operators, different experience, different capital structures. So the way I would say is that it's like, know, my wife loves to go to these museums. It's like you take your glasses off and you look at this, like one of those Monet paintings where it's sort of like, you know, it's not, it's a bridge sort of there. I can see it. I know it's a bridge, but it's not, you know, your father's tool and die shop where you can actually build it and you have angles and you can do that. So.

Michelle Rowan (29:28)
Yeah.

Tom Spadea (29:42)
you know, be cautious when you're looking at an item 19 to think this is generally what the business model is. And you can fool yourself with a million assumptions. You change one thing in there and you're like, oh, if I sell this. So I think that it's telling you, is this a business that people are doing a couple hundred thousand in revenue or they're doing a couple million dollars in revenue? Is this a high margin business or is this a high volume business? It's teaching you about what the business model is. If you want a flat rate of return,

Go buy a Vanguard Mutual Fund. Go buy an apartment building with a rent roll. This is not a historical business. You're not buying, I was a business broker, you're not buying a business with tax returns. So don't be fooled into the granularity of what that is. The item 19 is just explaining to you what others have done in the business, showing you the range, but there's so many variables in that, so it shouldn't scare you away.

but it also shouldn't be dispositive of like, this is a guarantee. This is what I'm going to get. It's just coaching you and teaching you to say, this is the business model. These are the margins we expect. This is kind of what your labor percentage might be, your cost of goods sold, your occupancy, and giving you some data points. At the end of the day, you're the biggest variable. You know, when you have these thirds and you have this great variation from the bottom franchisees to the top franchisees, yeah, location, that has an impact.

But the biggest impact is the franchisee. So you, I think that a prospective franchisee should be more thinking about a cultural background match. You know, are they going to fit into this business model? Are they going to be proud to be? Are they going to be selling all the time? Are they going to be really embracing the business model? And then this is what the outlook could be. I think sometimes people get it backwards. Is there like, if I buy this franchise, I'm going to, this is what my Item 19 is going to be. There's a lot of steps. So it's valuable. You should read it.

By the way, franchisors are not required to put in an item 19. a franchisor should give a really good reason why they don't have an item 19. I really think you should have an item 19 because it should tell the story. You should know it. It's they can't, if they don't put it in there, they shouldn't be talking to you about any numbers. If you see a PowerPoint in a discovery day where they send you a chart or they give you numbers that are not in the item 19, that's a really big red flag.

And so that's a red flag because the laws essentially says the regulations say, you want to talk about the business model. If you want to do that, you need to be putting that in there. You need to put that in item 19. That's how we teach compliance, the four corners of what's in there. So you put the data, you can talk about the data and you can't talk about anything that's not in there, but they're not required to put it in there. And so if they don't put it, you're really shooting in the dark a little bit. Sometimes emerging brands won't put an item 19.

That's something to keep in mind.

Michelle Rowan (32:32)
Okay, so

here's where I'm going to have my first respectful disagreement with you, where you said franchisors shouldn't drill down, that you coach them to stay high. I think that franchisors have good intentions when they're drilling down. They're trying to give you all the information as best they can for you to get there. So it doesn't, I don't not like it when people drill down. I think it's great.

Tom Spadea (32:37)
Go.

Michelle Rowan (32:56)
But again, this is where having a franchise attorney helping you understand this, that are you looking at corporate stores? Are you looking at the highs, the lows? Like they will tell you what they're showing. I don't think it's a bad thing to drill down. I will say, especially in the last 10 years maybe, franchisors have taken to turning this item 19 as into a marketing tool in this. So again, I love that you're cautioning them on what are you looking at.

Tom Spadea (33:17)
Exactly.

Michelle Rowan (33:21)
And I did make a note, I wanted to talk about the emerging brands piece because it is hard to create that item 19. But if you are a franchisor, the idea is you've built a business that has been tested in markets and works because you're supposed to be building something that is repeatable in different markets and it shouldn't depend on size, location or anything. So they could at least show corporate data in there.

But I do think it's helpful because I always recommend to candidates, if your franchisor isn't telling you to put a business plan together before you invest in a franchise, having a business plan is a good idea. And this item 19 can try and help you. Again, don't assume you're going to be at the top of it. Do your worst case scenario. Do your average. Whatever you can. But I think the item 19 can help you try and be predictive. It does depend on the owner. OK.

Tom Spadea (34:10)
Yeah, no, I agree. My only caution

to that is, and so I love that discussion about the Jordan. So I think that sometimes people get a false sense of security by so much data. And so they get so much data and they get into the weeds and they're like, this is what my gas cost is going to be. You don't know that. And so you get like fooled over the details where you start getting this like comfort level because you have so much detail. And so you start to like, abdicate your own responsibility as a franchisee.

Michelle Rowan (34:20)
Got it, okay.

Yeah.

Tom Spadea (34:38)
So I agree with you, put your own business plan together, understand and also understand the variance that could happen with respect to what's going to happen in your business compared to what you saw in the item 19. So that's the only cautionary. On a note on the emerging brands, another thing to be cautious about is look at the assumptions and and and what they were doing in terms of like when they disclosed it. Sometimes I'll have clients who maybe they have like a $5 million business that they want to franchise.

Michelle Rowan (34:41)
Yeah.

Tom Spadea (35:08)
I don't always think that that's a great thing to put it on because then you're full because it they've been in business for 20 years. So that's just a different business than the business that they're franchising. So be very cognizant of like how long they've been in business, how it's unique. You know, they can err on the in either side. So you just you got to go into it with with eyes wide open that this is information, not what your business is going to be, but what someone else's.

Michelle Rowan (35:32)
That's great. That's a great caution. All right. One of my favorite parts of the FDD, item 20. It's the status of outlets. Tell us what that is. Me too.

Tom Spadea (35:42)
So that is my favorite part of the FDD.

That is the absolute, if you had to only get one, they said, hey, you got to buy the franchise and you only get to look at one item. There's only one item that we're giving you. Which one would it be? I would pick item 20. I used to do this, maybe dating myself, David Letterman countdown. I would do some of these presentations and I would go in the reverse order of the most important items in the FDD. And item 20 was always the number one.

Michelle Rowan (36:10)
love

how you can make legal documents fun. I love this idea.

Tom Spadea (36:13)
Yes. So, right. Hey, it's like Jeopardy

here. So, so item 20 is so important. So as I think I mentioned when we were talking about the FDD, if you buy a franchise, you're going to be item 20. And this is that like feedback loop that I think is such a wonderful thing in franchising is that, you know, there's an accountability for the franchisor because you as a franchisee are now going to buy the franchise. You're going to be open. You're going to be operating and people are going to call you. Call them.

And not like, every Wednesday night, our best performing franchisees do this town hall, go join that. And then we, as lawyers would say, did you do your due diligence? Did you talk to franchisees? yeah, I joined the town hall. That's not doing due diligence. You got to go out, find them. know, you're, you're, this is a pretty big bet for you, right? Like, you know, aside from maybe who your spouse is, buying your business is like the next biggest decision you're making in your life. And so take the time.

Michelle Rowan (37:06)
Yes.

Tom Spadea (37:10)
Go get a cup of coffee with somebody. Go meet them in person if you can. Talk to them. know, yeah, it's like kind of annoying sometimes for a franchisee in a high growth franchise. They're getting a lot of these calls. Do the work. Put the time in. You will not regret it. you're not like, you're not asking them like, hey, how much money do you make? What should you be asking them? You should be asking them in item 20, those questions. Validate, hey, item seven, the investment, was it what you expected? Would you do this again?

How is the franchisor with conflicts? Like as wonderful as we all think life is going to be, there's going to be conflicts. This is like, it's like pre-marriage counseling. You're trying to find out, you're about to marry this person and you want to know how are they going to be, especially for the fact that they hold most of the cards. I mean, they're the stronger, they, for all those reasons, they protect the brand, all those things we talked about, recognizing that they have a more powerful position in this relationship. So therefore you want to know how are they

How do they handle that power? Responsibly or irresponsibly? Are they bullies? Are they arbitrary? Do they think things through? Do they roll out new programs without testing them because they're only paid on the royalties? Do they care about your profitability? Do they talk about your profitability? Do they care about you as a human being? Is this like a thing? Those are the important things. And you're going to get that from talking to franchisees. So that's the most important thing. And there's also going to be...

I would tell people, should call until you find somebody who's unhappy. If there's 50 or 100 units, somebody's going to be unhappy, that's okay. And if you tease it out of them, like, well, you're not successful, why? You might find out that they're saying things about how they run the business in contradiction to the way the franchisor advises you to run the business. So that tells you, okay, I better agree, I better be all in here and do what the franchisor wants or I'm probably not going to find success and that's okay.

Michelle Rowan (38:40)
Yes.

Tom Spadea (39:06)
That's a data point for you to use to evaluate. There's even in item 20, people who have left the system, call them, try to find them out. People who have left the system after two years, they might even be more forthcoming if they sold the store and now they're in there. do the hard work. don't be fooled. It's a relationship game. Franchising is all about relationships and where you find the relationship is talking to the existing people in those.

Michelle Rowan (39:33)
Yeah,

yeah. So, okay, a couple things that I want to add here. Former franchisees, so people that have left the system are in this. Did you say that it goes back two years? I don't know how long they disclosed that. Okay, so I didn't know that. We say the same thing. So one, if you pick up an FDD, if you get it from a registration state website and you're not engaged with the brand, the franchisees will not be forthcoming with you. So there is a good time for you to do this.

Tom Spadea (39:44)
Yeah, I think it's two years.

Michelle Rowan (39:58)
They, would say, do not reach out to franchisees until you're in the process with the team directly, because they will just shut down. We provide a lot of data for our clients. They can share kind of that high level data of how people are validating, but nothing replaces the phone calls and the face-to-face meetings with franchisees. So I think you nailed it as far as talking to them. And we say the same thing. Talk to unhappy franchisees. Ask questions about how.

Tom Spadea (40:02)
100%.

Michelle Rowan (40:22)
how hard they're working in the business, how much time they're working in the business to really get a picture of if it's a one-off or something more systemic. Also in item 20 is the transfers and the changes in units. So you can see if they've gone up or down. And I always try and explain that it's not always a bad thing when units are closing or transferring. think if you're seeing a lot of it, I wouldn't say don't invest in a brand that has it.

But I would assume that the franchisor is going to, like you said, tell you the story behind it. But I've seen a lot of franchisors that we've worked with where the type of franchise owner that does well in their system when they started is not the same person 10 years later or that does well. So sometimes there is a reason, the age of the system, that the franchisor might say, we're not going to renew you or we're going to

not invite you to continue on with you or there's a reason behind it. So I just say don't write them off because of that, but talk to them. Do you coach your franchisors or what would you say about if you're seeing a lot of transfers, closures, anything like that?

Tom Spadea (41:26)
I think you hit those really good points. I agree with you. I think that one of the weak points of the disclosure document, remember the disclosure document is laid out by, you know, bureaucrats and regulators. there's a lot of legacy things that we have to disclose. And one of the failure points is that, or not failures, or inadequacies, let's say, of the item 20 disclosure is that if someone sells a store for a million dollars or it got foreclosed on and they sold it for $50,000 and they ended up stuck with their SBA loan

it's disclosed the exact same way. So you have to be really conscious of it, but also know that it's not giving you the full information. A transfer is a transfer. so franchisors will kind of play this game to make that item look better. You just have to know that that game is being played behind the scenes where they don't want to terminate. They're going to hold this thing. They're going to resell it. And so those disclosures kind of show there's a natural attrition rate. You're totally right. Also about the first 15, 20 franchisees were different.

Michelle Rowan (41:58)
Good point.

Tom Spadea (42:25)
personality profile than someone who's buying a franchise with 2, 300 or 2,000 locations. And so a lot of times the franchisor has gotten more professional. The franchisor has changed. Maybe they got bought by private equity. They have a different executive team. And so the franchisees who were like, hey, don't bother me. I just want your brand name. I'll take care of it. I'm a scrappy entrepreneur. They might not be happy in a more formal system. So you actually have kind of this responsibility, you as the franchise buyer, to know who you are.

Are you a scrappy entrepreneur that's okay with an emerging brand? Are you someone who really needs a lot more support and more buttoned up and you're a little more nervous about this and ⁓ what's your personality and what's your approach to being a business owner? Is that matching the people that you're finding as you're doing this stuff? And so, you know, yes, you're always going to have turnover in systems. It's very natural. Resales. It's actually healthy for a system because those first 20

who are maybe a little more curmudgeonly, maybe they're better off also. Like I actually advise people, if they're upset at the franchisor, that's the first thing I tell people, sell, sell. And this speaks to the overriding theme we talked about with the strength of the franchise agreement in the FDD. A franchisee can get out of that relationship a lot easier than a franchisor can. A franchisee can just sell their store. A franchisor, if you don't want to sell, they're kind of stuck with you.

And so, you know, yeah, they can not terminate and all that, but that's pretty hairy and not actually, that's not done in nature as easily as it looks like it's done on paper. And so the franchise or holds all the cards in terms of the enforcement, but you have the escape pod that the franchise or doesn't have. just recognize that.

Michelle Rowan (43:55)
Yeah. Yeah.

That's

a great point. I never thought about that. one more thing in the item 20 I want your thoughts on, the projected openings. So this has also become a hot topic in franchising. It's called SNO so sold, not open. And people are finally addressing what is up when a franchisor has a lot of sold, not opens. How do you feel about it? And how would you coach a candidate to look at that document and use that information to ask more questions?

Tom Spadea (44:29)
franchisors can die in the franchising business in two ways. They can die of starvation, which is, nobody wants to do that, but they also can die of indigestion, which is a way more painful and uglier death. And SNOs the sold not open, you get a hot brand and they start selling. So I think you should look at that. I think you should ask that question. the question would be, how many...

stores do you think or how many outlets do you think you can open next year in terms of your staff? How many people can you put through training? And then look at that number of the answer that they give you and then can they validate that? Hey, how many people do you train a year? How many people can you go through? They're human beings. There's only so much. And so you get these, they go off the charts and everybody gets all excited. And the franchisees, you're not buying a stock. This isn't jumping on the Bitcoin bandwagon. You're a franchisee and you're not just buying something, taking it off the shelf and going home.

assembling it yourself. You're actually going in and someone's going to help you and help you launch. So there's a bandwidth that the franchisor has to support these franchisees and if they oversell and they have way too many sold not open, I mean they have 20 open stores and 200 sold not open, that's a huge red flag and franchisees look at it in a scarcity mindset of like, ⁓ I need to buy this before somebody else buys it. Do not.

look at it in a scarcity mindset. Look at it in a mindset of like, hey, I want to join an exclusive club. I don't want to join a club that they're letting anybody in. And so you, maybe they won't let you in. They're doing you a favor, but you would rather join an exclusive club than a club that just blows the doors open. You write them a check and you get a franchise. ask them how many candidates they rejected.

Michelle Rowan (46:10)
a great question. and on the sold not open, I think that there's also the consideration of a good franchisor doesn't grow by those initial fees that they're collecting, the initial investment. should be scaling on the royalties that they are building with this brand. And those sold not opens are also, there's usually a time limit. you're buying into a brand, that franchise agreement says you're going to open your location in.

24 months, whatever that term is. And if that doesn't happen, it just basically expires and the franchisor can resell that. So if that's like a strategy, it's not a good one. But sometimes they're selling multi-unit deals where they're kind of timing out those, you know, open one unit and then you have 12 months after that to open your second. So sometimes it does make sense. But if they're just selling all these to say,

200 units sold and we have two open, it's a great, how are they gonna execute on that? And they shouldn't just be sitting there waiting for them to expire. That's just not a strategy.

Tom Spadea (47:02)
And

I agree with you. I mean, you got to be really careful. because realistically, if you're not, let's say you want to open a three pack and you have these multi-unit development agreements and you're like, I want to lock up all this territory. And so it creates this like artificial pressure. And yeah, maybe you will lose out on the second or third, but you know, be careful about that because there's, and this might sound super unpopular, but you know, I'm...

known me awhile I'm very candid, there's a lot of pressure that comes in sometimes from the brokers or the sales consultants because they want to drive up those initial fees that, quite frankly, a lot of that doesn't even go to the franchisor. if you want to open three locations, you should have the financing lined up for three. Because think about it from the bank's perspective. If they say, you're going to open one store a year for three years, and it costs the half a million dollars to open a store, that's not going to happen if you're not financed because the bank wants a full year of financials.

And it probably takes six to nine months from when you start looking for a property to open it. So you just start doing the math. If you don't have the financing in the bag for your first two locations, you're never going to get them open in the first 24 months. And so now the franchisor, what they end up doing is they've collected half the franchise fee for store number two or store number three, typically. And you want to be cautious of that because what's happening is

that you're not now hitting the schedule. And so now you're in a position where the franchisor is like, okay, we're either going to extend it or we'll just let you out of that second half. So that's a good question to ask. If you see a lot of filled amount opens and they do a lot of multi-unit agreements, I think you could ask, look, how many of your multi-unit agreements actually fulfill a hundred percent of their development schedule? Because I think it's kind of rampant in franchising that people don't always fulfill their development schedule. And so they would have been better off just with one.

Michelle Rowan (48:27)
Yeah.

Tom Spadea (48:47)
Buy one store, learn the business, get in there, crush it, keep your capital and put that into marketing and get an awesome first store. You can be in the biggest system in the world. If you're a great operator, if you love this business, if you're profitable, if you're in the top 25 to 30 % of franchisees, you will have opportunities to open a second store. I guarantee it. Even in the biggest systems, they want good operators. So focus on that first one. That's my take.

Michelle Rowan (49:14)
I

think that's great advice. Okay. Last item that we're talking about today, item 21, the Franchiseurs Financials. Let's get into that one.

Tom Spadea (49:22)
that's important. And I think it's skipped over a lot in due diligence. So you think about it, a new startup franchisor, they have to have the financial wherewithal to be supporting you. A franchisor's business model is different than the franchisee's business model. Franchisee is building a cashflow business. They're going to open up, they want to start making money, they want to support their family.

Michelle Rowan (49:26)
Yes.

Tom Spadea (49:43)
They're not, maybe they have kind of an exit, but it's not going to this massive exit, for the most part, the individual franchisee. Whereas a franchisor is building something like a software system. typical franchisor doesn't really make a lot of money in the first couple of years because they have all this support. They have to build all these things up. They got to pay guys like me. They got to do all these things. And so you want to see that your franchisor has sufficient capital to really support the business. And one thing to be on the lookout for

And it's not a bad thing or a good thing. It's just a data point. Are they at a point that their royalty fees, most in the financial statements, are going to break out royalty fees and franchise fees? Are they dependent on franchise fees and selling new franchises to support their operation? So look at their royalty fees and imagine that the franchise fees were non-existent. Can they support their operation with just the royalty fees coming on board?

That means they're going to be more of a sustainable business. So I think you have to look at that and show it. You should hire an accountant through this process. If you're a franchisee and you're going through, get an accountant, get a CPA, get someone who can help you with that business plan, go down to the SCORE desk and get someone. And not only are you looking and evaluating the item 19, the financials, you should also be looking at the health, the financial health of the franchisor. That's important because that's the person that you're depending on to not blow up because that'll

that'll hurt your business.

Michelle Rowan (51:09)
I think you're actually the first guest that we've had talk about score. Do you want to just tell people real quick if they're not familiar with SCORE They're all over the place.

Tom Spadea (51:16)
Yeah, so it's ⁓

I don't I forget what the acronym actually stands for, but it's a bunch of retired executives that the SBA has this thing and so they do a lot of times it's nonprofit doesn't necessarily cost you anything. It's in every city and there are people who will will sit down and you can make an appointment and they'll and they'll talk to you about starting business and they'll look at your business plan and I think they'll try to drill into the human side of it. they're not looking at a $50 million business. They're looking at someone

who's rightfully nervous and scared about going from a W-2 employee to an, and by the way, I'm a full believer, franchising is the best way to go from a W-2 employee to a business owner, because you have that support. A la my own experience, you know, the old story I told about how when I went broke, wish I was a franchisee. SCORE's this resource, they're not trying to sell you. You know, look, franchisors are great, but they're in the business to sell you the franchise. There's all the people and all the ecosystem in franchising and even your banks and everybody.

They want to do deals. SCORE's this like, it's like a time out, take a deep breath, find an advisor who's going to just kind of give you some perspective on what it means to be a business owner. Cause it's not, you're making two decisions as a franchisee. One, the one we're talking about, what's the franchise evaluated that, but don't get lost in the details that you're making another decision. Are you as a human being wired

Michelle Rowan (52:20)
Yeah.

Tom Spadea (52:37)
to own and run your own business. You gotta make that evaluation first and that's something you just have to make a decision on and own that decision. think SCORE can help.

Michelle Rowan (52:48)
Yeah,

so and I'm a huge fan of SCORE their website is score.org and you can put in your zip code and it's people that have run businesses and they're just there to mentor you. So a huge resource and I'm a little embarrassed we've gotten this far into the podcast and haven't even talked about them. So I thank you for bringing that up. Okay, so did we cover everything with the item 21? I think so too.

Tom Spadea (53:09)
So

Michelle Rowan (53:11)
You've talked about through this conversation, some of the red flags. Are there any other, just from your experience in all the different aspects of franchising you've been in, or any other, what I would call shady behaviors that you would like to call attention to that candidates should look for, either specifically with this FDD or just kind of in general through their process, things that stand out to you.

Tom Spadea (53:31)
I think the non-legal piece of it, the non-agreement piece of it, I think that the approach, are they hard-selling in the franchise? Or are they evaluating you as a candidate in their system? Are they playing the long game? And do you really feel that they're asking questions about you? Are they challenging you of are you right for our system? Or do you get the feeling that they're not really even asking you any questions, they don't really care, they're just like, we just want to sell a franchise.

and ⁓ beware of the speed. Like when people were like, you got to do this tomorrow or someone else is looking at it, beware of the speed. And look, I'm a responsive guy and I've sold before and I get it and speed works and pressure works on people. Don't fall prey to that. So just really take a deep breath and make this decision for yourself. Is it right for you and your family? And so just beware about those kind of tactics in terms of the selling. Do you really feel these are people you're going to be with?

very, very long time. It's not a sale, it's a marriage.

Michelle Rowan (54:30)
and then other recommendations you have for candidates outside of the FDD and the franchise agreement. you recommend that they have a business plan. We've recommended that they work with a franchise lawyer, someone that knows franchising. Any other kind of tips or things that they should be doing, work they should be doing, or even resources they should look at outside of these two documents that we've brought up today.

Tom Spadea (54:54)
Well, as part of that business plan, would say I would try to line up at least have a really good understanding how you're going to finance this. that's your responsibility. So the franchisor is going to say, fill out this financial form and they're going to approve you. But it's really a soft approval. mean, they're just making sure that you're going to be able to get financing. That's on you. there's nothing wrong with the franchisor pointing you in the direction of some banks and SBA lenders. So you got to think about how you're going to finance this business. one of the things you're not in a worst case, can you live?

Michelle Rowan (55:01)
Yeah, great point.

Tom Spadea (55:20)
That's the other thing to really think about consideration. There are some service businesses that you can cash flow right away. A restaurant, you open a restaurant, you should be cash flowing on day one. When you open a service business that's relationship based, it might take you two years now. You have low attrition and it's a more stable business over the long term, but you got to think, does the cash flow projections that you're thinking about in this business really match your lifestyle and you might need to borrow. that's another thing actually I should have mentioned back to item seven, probably that's.

They put in item seven, one of the line items is three months of working capital. That's kind of like prescribed by the regulations. In fact, we've had pushback from regulators when we try to make it longer, because we're like, hey, this business takes a year to really get going. We want the candidates to have 12 months of capital readily accessible. They put three months in there. That is a standard. That does not mean that the franchisor thinks you're going to be independent in three months. So you need to think about the business and your own personal life.

Can you pay your mortgage? Can you pay your house? Your spouse probably still wants to go out to dinner once in a while. Can you vacation? Can you pay your kids school? A lot of people transitioning in the franchising, transition to it in a time in their life where their lifestyle is kind of expensive. own that, know it, understand it, and your business is connected to your personal life. Can you handle the, can you weather that storm financially? Really dig into your own finances deeply.

Michelle Rowan (56:44)
Yeah,

and I think that's another great question to encourage people to ask franchisees when they're validating is how long did it take you to break even or did you break even in the timeframe you thought? How much cash did you put aside? Those are great questions to just try and understand, especially ones that have gone through it recently. You'll have a better sense of how inflation, how construction costs are really impacting those numbers.

Tom, this has been a fantastic conversation. I really appreciate you helping us dig into this and hopefully helping people make great decisions on which brands they join or that franchising is not right for them. That is what we're here to do. So appreciate all of your expertise that you shared today and hope you'll come back and maybe we'll jump into that franchise agreement. That's a little bit more complicated.

Tom Spadea (57:28)
You bet. Anytime. Thanks, Michelle.

Michelle Rowan (57:29)
Thanks,

Tom.