Tips on Evaluating a Franchise Earnings Claim?

The first thing you should know about franchise earnings claims is that they must meet certain specific requirements. These include, but are not limited to:

•They must be in writing
•A description of what the claim is based on, as well as any assumptions that were made must be present
•Information on the number of units whose figures actually equal or exceed the earnings claim amount, and the percentage in which they do, must be provided
•Supporting documentation and information must be available for inspection, and an offer to produce and show the same must be extended
•Earnings claims should contain language that is considered cautionary.

Now that you know what an earnings claim should look like, you can go about finding one. Start with the franchisor’s Franchise Disclosure Document (FDD). One of the articles, items, sections, chapters, or whatever the subject divisions are called will allow the franchisor to give information on potential earnings.

A franchisor is not required to disclose this information. If he chooses to do so, he is required by the Federal Trade Commission (FTC) to do so in writing, and to make sure the information is as accurate as possible.

Just because a franchisor does not include this information does not necessarily mean there is a problem. Rather, the company may be too new or there may be such a small number of franchises that the earnings claim would not be a true indicator of such figures. Once the franchises have been operating for a while, or business has grown, such figures would most likely be more accurate.

It also takes time and not a little bit of money to compile and make such a report. And, sometimes, after a franchisor has expended the time and money, the report may present information in such a manner that the franchisee may form a less-positive, and possibly erroneous, opinion of the company.

You can still get an idea of what a franchisee’s earnings claim would say if there was one, by looking at the section of the FDD that tells you who is currently a franchisee and who has been a franchisee. This information includes a way to contact these people.

If you do contact current and former franchisees, keep the conversation limited to averages and ranges as they pertain to figures. Take a little time to get to know the franchisee first, by discussing general topics, then move on to financial matters.

Talk to several franchisees, not just one or two. In this way, you will have a more complete picture of the operation.

Now, look at the information you’ve obtained. Find the franchisees who operate in similar situations such as yours will be, add up how long they’ve been in business, subtract expenses, take two painkillers for the headache you probably have by now, and look at the total. This should be a reasonable expectation of your possible earnings as a franchisee.

Remember that this figure is not going to be completely accurate. Other factors will need to be considered, and will figure into the overall total. You should have enough information, however, that you can make an informed decision as to whether or not this is a good investment for you.