Earnings Claims: Franchisors Can But Often Won't
Franchisors naturally try hard to persuade candidates to buy their franchise. Unfortunately, in their eagerness to sell, up until the Federal Trade Commission’s Franchise Rule of 1979, many an unscrupulous sales person provided potential franchise candidates with inflated and bogus earnings claims of typical franchises in their system.
The pendulum has now swung the other way. Many franchisors will not provide historical franchise earnings or projections, even though The Franchise Rule DOES NOT prohibit the release of current or projected earnings of any kind -- whether it be for the franchise network as a whole or a typical franchise in a system. What it does require is that the information cannot just be told orally to a franchise buying candidate from the sales person. Any oral claim must have a "reasonable basis" in writing in the Uniform Franchise Offering Circular, specifically in Item 19 – the Earnings Claim section.
Since the FTC DOES NOT REQUIRE the disclosure of earnings claims, some franchisors elect NOT to say or project any earnings. After all, real figures of current or projected earnings might not sell very well. There is also concern that if written averages and projections are not “reasonable” enough, such a peg in the ground of an actual number opens tthe franchisor up to law suits. For many, the safest thing is to not be pinned down to any earnings claim.
If a franchisor does not provide an estimate of earnings, a franchise buyer typically is instructed to approach individual franchisees in the system to get this information. Since store owners are naturally reluctant to show their financial statements, this can often mean that a potential franchise buyer leans heavily on the franchisor’s sales staff to point the way to franchisee’s who, for various reasons, are willing to open their books and discuss their financial performance.
So, if you hear a franchise sales person say that legally they cannot make earnings claims, you now know the rest of the story.
Re-Earnings Claims
I always tell folks that earnings claims that are disclosed can be a nice head start in regards to research.
However, I have seen earnings claims to be a big stumbling block in some cases.
For instance, if one's expections and hopes are that one would make $100k after being a franchise owner for that particular franchise in the third year of business, and the earnings claim states that the average is more like $40k, then one may stop the process right there.
I always suggest that folks do more digging, and talk to several franchisees. Maybe the figures are low. Or even high.
Folks usually forget about the other pieces in the puzzle; such as the tax benefits of being a business owner, and having multi-units each earning $40k possibly.
If folks that are looking at franchises would take a breath, and get ALL the facts before giving the specific opportuntiy a thumbs up or thumbs down, everyone in our industry would win....
Franpro