What Are the Rules Regarding Franchise Earning Disclosures?

If you're considering buying a franchise, one of the most important early steps you must take is determining what its actual quarterly and/or annual earnings are. This is crucial information to have before investing, in order to know whether the franchise is flourishing or withering financially.

In reaction to some rather questionable business practices during the sixties and seventies, in which prospective franchisees were provided with misleading documents regarding franchise earnings, Congress introduced legislation requiring the Federal Trade Commission (FTC) to regulate the franchise industry and create new rules regarding what a franchise must disclose to prospective franchisees.

Today the FTC does not restrict a franchise from supplying information about their current and projected earnings — all a franchise must do if they want this information made available to a potential franchisee is to put it in writing in Item 19 of their UFOC (Uniform Franchise Offering Circular) disclosure document. The financial information in Item 19 must be as clear and accurate as possible. After a franchise has done this, it is free to reveal whatever it would like about sales, income, and cash flow.

Do know, however, that many franchisors can be hesitant about revealing this information, as the real numbers regarding income and projected earnings may not always look that appealing to potential investors. Basically, the ball is in the franchisor's court in regards to whether or not they will disclose this information, since there are no FTC rules forbidding a franchise from not revealing their financial figures.

If you are unable to procure earning disclosures from the franchisor, you must move to step two, which involves consulting existing franchisees for their insight into what shape the business is in. These can be tricky waters to navigate, for you don’t want to potentially offend a current franchisee with blunt questions about money and income. Strive to be as sensitive and careful with your questions as possible (try proceeding as if you’re asking a close friend or relative about his or her financial situation).

Inquire about how the franchisor helped the franchisee get the business up and running, and what kind of marketing tactics the company had in place to create interest in the franchisee's new location. You should also ask about the franchisor's supply purchasing strategies. Does the franchisor harness buying power in a manner that allows the franchisee to save money when making supply purchases?

After (hopefully) getting solid answers to these kinds of questions, ask the franchisee this big one: How long did it take — and how much did it cost overall — to get the franchise to break even? Also ask about the franchisee's knowledge of the franchise company's averages on a whole (that is, what its typical gross sales are). Other topics to touch upon include net results versus net profits, cash flow, and whether or not the franchisee's operations have lived up to the franchisor’s projections.

Be sure you pursue this line of questioning using a respectful and politely inquisitive tone. Make sure the franchisee knows that you're seriously interested in becoming a part of the family, and that you just want to be definitely certain you’re making the wisest decision.

For more helpful information, visit the FTC Web site to read the Guide to the FTC Franchise Rule.