Before you hand over your life’s savings to invest in a franchise, you need to make sure you’re buying into a company that’s completely transparent about the financial performance of the franchisees and the potential money you can make.
Beware of companies that don’t reveal the important numbers or hide behind fuzzy franchise figures that keep you in the dark about true profits.
Here at NTY Franchise Company, the parent company of Clothes Mentor, we’re proud to be one of the most financially transparent franchisors, allowing you, the prospect, a deep dive into the numbers that will make or break you as an owner. We’ve opened our books because we’re proud of our impressive sales figures that blow away competitors along with our 65% profit margin – all amazing retail stats we want to brag about!
In this blog, we’ve laid out a research roadmap you need to follow to make sure you’re buying into a company that will support you and your family in the American dream of business ownership.
First Comes the FDD
Pay close attention to the FDD. It’s a legal document that spells out all the terms of a franchise agreement to you the franchise buyer. It’s a full disclosure of the critical factors you should consider during the most-serious stage of due-diligence — before agreements are ultimately finalized and endorsed.
According to Franchise Rule law — established and enforced by the Federal Trade Commission (FTC), prospective franchisees must receive a copy of the FDD at least 14 days before they are asked to sign a contract or pay any money to a franchisor.
Every FDD is required to have 23 sections or “Items” — each with its own purpose. These range all the way from a history of the franchise concept to fees; services provided; actual contracts to be signed; and even acknowledgment of receipt of the document. Of the 23 Items required within FDDs, the one that often gets the most attention by prospects is the Item 19.
Look for a Detailed and Transparent Item 19
The FDD Item 19 details Financial Performance Representations. It’s the section that, according to FTC law, “permits but does not require” franchisors to provide prospects with a window into how much money they could potentially make owning and running a franchise. It typically details the performance of existing units or groups of units.
According to FTC franchise law, a franchisor is permitted to provide written or oral representations about the actual or potential financial performance of its franchise and/or franchisor-owned units if there is a reasonable basis for the information AND if the information is included in the FDD Item 19. Financial performance information that differs from that included in the Item 19 may be given only if: 1) A franchisor provides the actual records of an existing outlet that one is considering buying or; 2) A franchisor supplements the information provided in Item 19, for example, by providing information about possible performance at a location or under particular circumstances.
Believe it or not, if the above FDD 19 requirements are not met, it is literally illegal for a franchisor (or for their existing franchisees/affiliates) to provide you with any other financial performance information or projections of future income — either orally or written. For franchisors that choose to not disclose any formal representations in the FDD Item 19 (again — a right they have under FTC law) you as a prospect are completely on your own to project how the business will perform. Believe it or not this “no disclosure” dynamic is the case for roughly 50% of all franchise concepts out there. So, buyer beware if you’re considering buying a franchise that does not give you detailed performance financial information. On the contrary, NTY Franchise Company’s Clothes Mentor lays it all out so there are no mysteries or guesswork.
A MODEL FOR ITEM 19 DISCLOSURES
We at NTY Franchise Company are proud we’re a leader in the rapidly growing category of upscale resale and a model for financial disclosures in our detailed Item 19.
Clothes Mentor was NTY Franchise Company’s first — and remains its most popular — franchise concept within its portfolio of five established franchise brands. NTY Franchise Company acquired the franchise rights to Clothes Mentor in December 2006 when there were only two stores operating in Ohio. Shortly thereafter, in early 2007, NTY Franchise Company began marketing and selling franchise rights to the brand.
In a little over a decade, since NTY Franchise Company began franchising the Clothes Mentor brand, it has become the largest women’s upscale resale franchise company in America — with 145 stores today. With plans to reach a total of 200+ over the next several years, Clothes Mentor is quickly becoming a force in the global discussion on women’s upscale resale clothing.
Since Clothes Mentor is well established, with a significant number of units generating performance data, we go way out of our way in our FDD 19 to provide a wealth of information to prospective franchisees on how the fleet performs.
While other brands’ Item 19 may list net sales only, Clothes Mentor’s Item 19 digs deeper to give you net sales, gross profit/gross profit margin, operating expense breakdown and financial performance by years in operation – unheard of details for most franchise brands!
Check out the details in Clothes Mentor’s FDD Item 19 for 2017 and then compare it to other brands!
NET SALES DISCLOSURE
Net Sales is all revenues received from the sale of goods and services — less sales taxes, discounts, customer refunds and returns. With data on 135 Clothes Mentor stores open more than a year, NTY Franchise Company provides Net Sales data for each quartile of stores within the group — including what percent of stores within each quartile met or exceeded the average within the quartile. Let’s cover some of the numbers:
Of the 135 measured Clothes Mentor stores, the top quartile had Average Net Sales of $952K in 2017 (with a range of $1.62M – $757K); the bottom $328K (range of $440K – $153K); and the average — $600K. Roughly 43% of the stores in each quartile met or exceeded the average for the quartile. “These figures say a lot — as in my 26 years of experience I’ve observed how independent, non-franchised women’s apparel consignment stores typically generate annual sales revenues of $175,000 – $225,000,” notes Jim Wollman, Vice President of Franchising and Franchise Coach at NTY.
Looking at this relative performance another way, according to the 2010 U.S. census (most recent conducted), only 11% of ALL small businesses (defined as 20 employees or less) have annual sales revenues that exceeded $500K. This compares with roughly 60% of the 135 measured Clothes Mentor units having Net Sales over $500K. Clearly, 60% versus 11% is a heck of a comparison — further illustrating the power of the Clothes Mentor brand.
GROSS PROFIT DISCLOSURE
Net Sales is one thing, but Gross Profits is another — and often more relevant when analyzing a business. Gross Profit is Net Sales less Cost of Goods Sold. Note that Gross Profit does not reflect various store Operating Expenses (which we’ll get to later).
NTY Franchise Company provides Gross Profit and Gross Profit Margin (which is Gross Profit as a percent of Net Sales) for each Clothes Mentor performance group quartile — including again what percent of stores within each quartile met or exceeded the average of the quartile.
Of the 135 stores, the top Clothes Mentor quartile had an average Gross Profit of $618K in 2017 (with a range of $1.101M – $493K); the bottom $213K (range $293K – 104K); and the average — $390K. Roughly 42% of the stores in each quartile met or exceeded the average within the quartile. Overall, all quartiles have an average Gross Profit Margin of 65%. This 65% level is very attractive when compared with the approximate 30 – 35% average Gross Profit Margin for traditional specialty retailers — also highlighting the power of the Clothes Mentor franchise brand.
PERFORMANCE BY YEARS OF OPERATION
We go even one step further in the Clothes Mentor FDD Item 19 by disclosing Net Sales and Gross Profit/Gross Profit Margin by stores’ years in operation — including also what percent within each age category met or exceeded the average within the category. This disclosure is unheard of in many brand’s Item 19s and gives you visibility into how stores progress in performance over time. To no surprise, the longer the units are open — the better the performance.
For example, Average Net Sales for the oldest Clothes Mentor stores (8 – 10 yrs.) was $776K in 2017 (ranging from $1.527M – $427K); while the youngest category (1 – 2 yrs.) was $409K (ranging from $847K – $182K). Average Gross Profit for the oldest Clothes Mentor stores was $509K (range $1.032M – $270K); with the youngest being $264K (range $539K – $125K). Roughly 41% of the stores in each age group met or exceeded the average for the group. Quite impressively, average Clothes Mentor Gross Profit Margin remained consistent at around 65% among all store age categories — exceptional when compared with the 30 – 35% approximate average of specialty retailers.
OPERATING EXPENSE BREAKDOWN
Here at NTY Franchise Company, we also give you the prospect a peek into operating expenses, so you get a true picture of what it takes to run a store, pay for employees, insurance, etc. This is also grouped by age of store for the average of 82 Clothes Mentor units that have provided enough data for the compilation. This includes average: Rent/Insurance (12.9%), Marketing (5.2%), Payroll (22.7%), and Other (13.2% — which includes royalty fees of 4% of net sales). Collectively, when considering all the components and qualifiers of these figures detailed in the FDD 19, these compare remarkably well with traditional specialty retailers.
With an honest and detailed financial picture, you can easily see the potential of the brand- under various scenarios — to project your income potential as a Clothes Mentor franchise. With other brands, it’s just guess work and you should insist “Show me the numbers!”
PUTTING FDD ITEM 19 INTO PERSPECTIVE
It’s clear that we at NTY Franchise Company include a significant amount of information in our Clothes Mentor franchisee FDD Item 19 and the numbers are impressive versus industry averages. However, even with transparent disclosures, you need to keep in mind how various factors could influence some of the data regardless of which franchise concept you’re considering.
A key example is that some franchise owners draw direct meaningful salaries for themselves — included in payroll expenses of their units — while others do not. By providing disclosures compiled of data from so many units, NTY Franchise Company strives to make apples-to-apples comparisons easier — but the process is never perfect.
The bottom line is that a robust FDD Item 19 — like the one NTY Franchise Company provides on Clothes Mentor — goes a long way to help you make an educated, intelligent decision on whether to invest in a given concept. You should use this information as a key piece of the due-diligence process and enhance it with “kicking the tires” — including visiting franchise locations and calling owners themselves.
THE GOOD-OL’ ADMONITION ACKNOWLEDGMENT
Any discussion of the FDD Item 19 would not be complete without covering the admonition acknowledgment. Whether related to Item 19 or any other phase of your due-diligence process, you need to know that past performance is no guarantee of future results. The FTC requires such language in the FDD Item 19 — to caution prospective franchisees that their results may differ from that detailed in the Item 19.
While the FTC does not require specific language with the admonition, we at NTY Franchise Company say “Clothes Mentor stores have earned this amount. Your individual results may differ. There is no assurance that you will achieve the same or similar results.”
A SMART CHOICE FOR SUCCESS
Remember, there are no guarantees on anything in the franchise world — or life for that matter — regardless of how good the data or situation looks. But with more than a decade of impressive expansion in store count; very favorable data evident within its FDD 19; and the seasoned, highly-effective support infrastructure at NTY Franchise Company, the stage is well set for you, a prospective Clothes Mentor franchisee, to realize success. Mix in real focus, determination, some grit and hard work — and we know you will be great success!
NTY FRANCHISE COMPANY
Founded in 2006 and Located in Minnetonka, Minnesota, NTY Franchise Company is a pioneering leader in the rapidly growing category of upscale resale. It is the umbrella organization for three proven national resale clothing franchise brands: Clothes Mentor (women’s designer clothing franchise); Children’s Orchard (kids clothing franchise); and NTY Clothing Exchange (teens and young adults clothing franchise).
NTY also has two other successful national franchise concepts: New Uses (household furniture, décor, appliances franchise) and Device Pitstop (electronics repair and resale franchise).
NTY specializes in working with entrepreneurs at every stage of establishing one of its franchise brands including: Research & Discovery; Business Planning; Store Location & Leasing; Financing; Design & Build-out; Point of Service Software & Systems; Coaching & Managing; and Marketing.
To learn more about franchising a Clothes Mentor — or about NTY Franchise Company and the other lucrative opportunities in upscale resale franchising — explore our main page or feel free to give us a call (952)-923-1223