Let’s say you are considering the purchase of a franchise. During the investigation process, you ask the franchisor how much money you can make. His answer is that he can’t tell you. Is he lying?
Not exactly. The early history of franchise sales in the United States contained many instances of abuse when unjustified or misleading earnings claims were used to sell franchises. In 1979 Congress passed legislation authorizing the FTC to regulate the franchise industry to try to stop any such bad practices.
The current FTC rules do not forbid a franchise company from supplying information about the earnings that can be achieved in their business. They do, however, have stringent rules on how this information can be given to a prospective franchisee.
This is one of the real quandaries of investigating most franchises. You’re not about to invest until you know how much you can earn; the franchisor probably has the best data to answer this question accurately, but they sometimes won’t tell you a thing.
Basically, any franchise that wants to provide this information must put it in writing in their Franchise Disclosure Document (FDD). It is essential for the franchisor to make sure that the data provided is accurate and non-misleading and they need to clearly label any assumptions or qualifications on the data provided.
Assuming they meet these two requirements, they are free to provide whatever earnings information they want to a prospective franchisee in terms of sales, expenses, cash flow, and income. Since it’s that easy, I’m sure you’re wondering: “Why don’t more franchisors do it?”
The answer is more complicated than you would think. First, producing an earnings claim does involve effort and expense for the franchisor. Second, the results (given that they have to be accurate and non-misleading) may not be attractive enough to assist in the recruiting of new franchisees. Third, if the franchisor changed its business model, the reported results might not be representative of the newer model and as such, not a good source of reference for you. There are other reasons as well, but the bottom line is this: Don’t assume that just because a franchisor does not provide an earnings claim, that it is not a potentially lucrative opportunity.
So, if you can’t get the earnings information from the FDD, how do you find out how much money you can make and what is a reasonable amount to expect to make? Stay tuned for the next blog post (“How Much Money Can I Make with a Franchise, Part 2”) for the answer!
Linda Bremer Menter is the Vice President of Consultant Development for FranChoice Inc., a national network of franchise consultants that provide free guidance and advice to qualified individuals in the United States searching for franchise opportunities that match their personal interests and financial qualifications.