Franchise Earnings Claims

If you are like most potential franchisees, one of the first questions you ask when considering a particular opportunity is, “How much money can I make?” A truthful answer would have to be, “It varies.” And that’s not much help when you are trying to replace your current income or when you are looking for an opportunity that you can grow to meet your financial dreams.

Fortunately there is a way to “ballpark” this information – it just takes a little work.

Your first resource is the franchisor’s UFOC (Uniform Franchise Offering Circular). Item #19 in the document allows the franchisor to state potential earnings information. Providing this information is optional for the franchisor, however if they do choose to disclose this information the Federal Trade Commission (F.T.C.) requires that it be made in writing, and that it be as accurate as possible.

One of the early problems in Franchising was that some unscrupulous franchisors would inflate the profitability of their current franchisees, enticing more buyers to invest. To prevent such misrepresentation, in 1979 Congress passed legislation authorizing the F.T.C. to regulate the franchise industry. Earnings claims are still permitted provided they are based on supportable facts and that they are only given to a prospective franchisee after following strict F.T.C. rules.

Not all franchisors choose to provide this information. According to FRANdata, a franchise research firm, about 24% o franchise companies with greater than 50 units provide earnings claims.

There are a number of reasons why a Franchise Company would choose to omit this information from their UFOC. First, newer companies and those with a small number of franchisees will not have reliable data to draw from. To have statistically significant information, a franchisor would need to have a variety of locations of similar size that have been open a number of years.

Compiling this information can also involve considerable time and expense for the franchisor. Finally, the results of this effort may not look particularly attractive to potential franchisees – in which case a franchisor is unlikely to include them in the UFOC.

In Part VI of “The Profile of Franchising: 2006,” found in the March 2007 issue of Franchising World magazine, FRANdata posits the question,”First and foremost, how reliable can the past performance of any business be as an indicator of future performance? Within the same line of business, and even within the same franchise system, there are so many variables due to location, market size, population and economic changes that many franchisors are reluctant to provide a ‘crystal ball’ view of future unit performance.”

If the franchisor you are interested in does not provide this information, there is still a way to get a pretty good idea of what the average franchisee earns and that involves another look at the UFOC – Item #20.

Item #20 lists current and former franchisees of the system and their contact information. Since you will be talking to the franchisees as part of your due diligence process, make sure you ask questions about the averages and ranges they are earning as part of the franchise system.

Keep in mind that asking how much someone earns can seem intrusive. We recommend that you begin your conversations with current franchisees talking about general topics such as challenges with employees and the quality of training provided. It will be easier to ask the financial questions once you’ve had a chance to establish a report with these franchisees. Also, the more people you talk to, the better idea you will have of the overall franchise system.

After you’ve talked to a number of franchisees, take a look at the information you’ve complied, particularly the information from franchisees who are working in territories similar to the size and population density that you will be buying. Factor in the number of years in business and the expenses and you will have a reasonable idea of how much you could make as a franchisee of that business.

Even with all of this work, you won’t come up with an exact number. Keep in mind that there are other important variables as well: how hard you work, the hours you put in (especially while the business is ramping up), your prior business experience, the quality of your employees, the training and support provided by the franchisor, whether the stars are properly aligned, and countless other factors.

The bottom line is that buying a business is a bit of a risk and the best answer to “How much money can I make?” as I mentioned in the beginning, is “It varies.” Choosing a great company with superior training, support and marketing coupled with your own determination to succeed are also strong indicators of what kind of success you’ll have as a franchisee.