How Much Can You Expect: Understanding Earnings Claims
If you're considering purchasing a franchise, and wonder just how much you will be able to earn and whether the business is a good, sound investment, now is a great time to learn more about earnings claims, and what a franchisor can and cannot tell you.
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.
Some franchisors simply do not feel comfortable giving earnings claim data to prospects. This is completely acceptable and legal. 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 franchisors how much money they will make if they purchase the franchise. 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 and it simply tells you how well the company's units have performed in the past.
Come To Your Own Conclusion
When choosing a franchise to buy, thoroughly research the company you're considering and then come up with your own conclusion on how well your business will do. It's important to remember that it is not only illegal but also not possible for anyone during the buying process to tell you that you will earn as much as the company's 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.