UNDERSTANDING FRANCHISE EARNINGS CLAIMS
As you might have assumed, “Earnings Claims” are assertions made by franchise companies of specific acquired sales levels or profitability levels.
Prospective franchisees are often surprised to learn that most franchisors will not say how much money they can expect to make. It’s not that franchisors are legally prohibited from providing earnings guidance. Many franchisors, for a host of reasons, simply choose not to do so. At some point, however, the questions will inevitably surface about earnings potential for the franchise.
Every franchisor is required to provide prospective franchisees with the Uniform Franchise Disclosure Document (FDD), which includes information about the franchisor and the franchise offering. If the franchisor has chosen to include earnings information in its FDD, you’ll find the information under Item 19 titled, Franchise Performance Representations.
While the format and methodology differ, Item 19 is based solely on historical data from the company’s units and may include various costs, ranges of sales at actual locations, statistical data about operations, and any other pertinent financial information. Item 19 can be relied upon because it is a formal, written, historical earnings claim.
Even if the franchisor does not provide you detailed earnings information under Item 19 of the FDD, you will want to review any information their competitor’s may provide. Remember, similar businesses often have similar results.
Investing in any franchise is an important decision that requires some time and effort. To help accelerate the franchise investigation process, contact Steve Schneider of Franchise USA, Inc. Get the information you need to make good, sound business decisions.
If you are not a sophisticated investor, be sure to seek the assistance of a franchise attorney, an accountant or other resource. They can help you dig through the data and put together a meaningful projection for your future business.