Growing Strong

Earnings Curve

Just how much existing franchisees earn is one of the most sought-after pieces of information among prospective franchisees. A recent Federal Trade Commission (FTC) statement may keep it one of the most mysterious aspects of franchising as well. In its first formal step toward revising its Franchise Rule, the FTC published an Advance Notice of Proposed Rulemaking indicating a disinclination to mandate franchisor disclosure of franchisee earnings.

"The FTC has always been concerned that franchisor earnings claims have as great a potential to mislead as they do to inform," says Neil A. Simon, a franchise attorney with Hogan & Hartson in Washington, DC. "The FTC sees prospective franchisees getting this information anyway, from other franchisees in the system and by researching the industry."

Yet some still see mandatory claims as an open issue. "The FTC's notice simply says they weren't persuaded yet," contends Andrew Selden, a franchise attorney with Briggs and Morgan in Minneapolis. "The challenge to franchisee interest groups is to contribute information to the record that would support [mandatory earnings claims]."

Another looming factor is the state rule regarding earnings claims, which is still being deliberated by the North American Securities Administrators Association (NASAA). Most predict NASAA will recommend state guidelines be revised to require disclosure of financial performance, leading to an interesting conflict.

"Whether the states, by mandating a higher level of protection, trump the FTC, or whether the FTC flexes its federal muscle and preempts [the states], that's an unresolved question," says Selden. "Once NASAA releases its decision, the two [groups] will have to sit down and work out a practical solution."

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This article was originally published in the June 1997 print edition of Entrepreneur with the headline: Growing Strong.

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