How Can I Tell If This Franchise Chain Is A Goldmine?

 First, beware of fool's gold. Most franchiser's will try their hardest to convince potential franchise buyers that what they have is pure gold,  when in fact it might be iron pyrate, looking to the untrained eye just like gold but being fool's gold. After all, franchisor's receive significant money upfront from buyers in the form of the franchise fee, and then they receive an ongoing royalty. So, there are big reasons ($$$) to try their hardest to convince you that they are sitting on a mountain of gold. Unfortunately, the franchisor may be sitting on a mountain of gold for them, but that mountain is built on the backs of broken and busted franchise owners.

The first thing to look at when determing real gold or fool's gold is to look at the earnings claim statement in the Uniform Franchise Offering Circular (UFOC). If the franchisor's sales rep made verbal claims about earnings, then they are required to back it up such claims in the UFOC. The claim may show average franchise earnings.

 Franchisor's care about revenue, not so much the bottom line of net income, because they make royalties from the top line. Franchise chains will declare same store sales (the sales per store that has been in their system for a certain period and which isn't weighted down by the small sales of new stores) of say $1.1 million.  That sounds great but it is not so great if expenses on average are $1.2 million on such stores, a figure the franchisor would not want to share with you but could.

Although the franchisor is not obligated to show the earnings of its franchise system, it's choice not to show such figures should raise warning signs. After all, the franchisor's financial statement will show its financial health and the earnings claims shows the financial health of its average franchise owner. Should it decide to hide that information from you, something's up. Be wary.

You are looking at something claimed to be gold without the proper tools to determine for yourself. You can go to franchise owners that the franchisor often selects for you to determine what their earnings are. For a new-comer, it's often difficult to determine the factors that made them succeed. And even if the owners tell you what they think made them succeed, they may not know, giving reasons for their success that may not reflect the luck that came their way. You can then hope that those few selected owners are representative of the whole chain and more specifically of your chances of success.