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
Franchisors Can Legally Provide Information about Earnings
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
- Items 5 and 6 will tell you about fees and the structure of
- 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.