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HOW MUCH CAN YOU EXPECT: UNDERSTANDING EARNINGS CLAIMS

by Pamela Gold
 

Are you considering the purchase of a franchise, and wonder just how much you will earn? Is the business a good, sound investment? Uncovered are the myths and the truths about franchise earnings claims that you should know before you purchase a franchise.

What is a Franchise Earnings Claim?
As you might have assumed, an earnings claim is any information you receive as a prospective franchisee which allows you to attempt to predict a range or level of potential sales, costs, income, or profits.

Franchisors Can Legally Provide Information about Earnings Potential
Often, people believe that by law, franchisors cannot provide prospects with any information on earnings potential. This is, in fact, not the case at all. There are stringent franchise laws in place to protect both the franchisor and the franchisee. In many states, the UFOC (Uniform Franchise Offering Circular) must be registered with a state agency in order for the franchisor to legally sell franchises in that particular state.

Most franchisors will not include earnings claims in their UFOC. This is completely legal as well. Some franchisors simply do not feel comfortable giving this data to prospects. In the UFOC, a legal earnings claim, if made available will be in Item 19 of the document. Item 19 is based completely on historical data from the company's units and may include the following information: various costs, ranges of sales at actual locations, statistical data about operations, and any other pertinent financial information. Item 19 is legitimate because it is a formal, written, historical earnings claim. Earnings claims that are not historical, written, or formal (filed with states) are not legal and cannot be accepted as legitimate.

What Isn't Legal?
Many prospective franchisees make the mistake of asking their franchise salesperson or consultant how much money they will make. A very common question, salespeople and franchisors cannot legally provide you with an answer. Whether you receive a scribbled number on a piece of paper or a range of figures within a conversation, do not rely on this information. In fact, the best thing you can do is not ask this question. The only legal form of an earnings claim is found in the UFOC in Item 19. Item 19, as discussed earlier, is simply a historical review of costs, earnings, and other financial data and does not promise you any amount of money. It simply tells you how well the company's units have done in the past.

Why is it illegal for a saleperson or a franchisor to estimate future sales and success of a new unit? For one thing, there are so many factors that play into the success or failure of a franchise unit. There is no way, based on the performance of other units, anyone can truly estimate how well a new unit will do. Secondly, it is not legal or safe for a salesperson or franchisor to even discuss via a conversation how well their other units are doing because if a new unit fails, there is a possibility that in court the franchisee could recall that individual telling them they would do well like the other units they spoke about. Legally, finances cannot be discussed anyplace other than Item 19 of the UFOC.

Do Your Research
The process of buying a franchise should always include lots of research on your part. You should never listen to everything you hear. The best way to know you are making a sound decision is by asking questions, doing research, and then putting all the information together to come to your own conclusion.

So where should you look for bits and pieces of information regarding earnings? The UFOC is always one of your most valuable places to start:

  • Items 5 and 6 will tell you about fees and the structure of those fees.
  • Item 7 will give you the particulars on how much you will need to invest to become a franchisee. The investment chart includes such information as types of locations, staff sizes, equipment, and inventory, and can be extremely useful as you try to project on how well your investment will do in your specific area.
  • As discussed earlier, if a franchisor chooses to include the information in their UFOC, Item 19 will give you a formal, written, historical earnings claim.
  • Item 20 is a list of current and former franchisees and their contact information. This is the most valuable resource you have! Use this list well. Ask the franchisees, current and past, about their unit's performance. They can and will give you factual information. Find out about their customer base, area of the country, what products/services did well and what did not. Gather the information together and then attempt to figure out whether the business will do well in the location you had in mind.
  • Finally, in Item 21 some companies will include a financial statement regarding company-owned unit performance. This information can be quite interesting and helpful to you as well.

Come To Your Own Conclusion
The best suggestion is to do thorough research and then come up with your own conclusion on how well your business will do. There are so many variables that might be forgotten as the exciting and nerve-wracking process of buying a franchise unfolds. It's important to remember that it is not only illegal but not possible for anyone during the process to tell you that you will earn as much as their leading franchisee. Instead, read the UFOC carefully, contact franchisees, present and former, and decide for yourself whether a franchise will be a sound investment for you and your needs.



Reprinted with permission from Pamela Gold at Franchise Solutions.
 
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Pamela Gold is a copywriter for Franchise Solutions, and has years of experience writing about franchising.

Founded in 1993, Franchise Solutions is a leading provider of franchise and business opportunity information on the Internet. Celebrating it's tenth anniversary this year, the Company has emerged as a full-service provider of marketing services for the franchise community.

Email: pam@franchisesolutions.com
Internet: Franchise Solutions

 
 
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