Though getting earnings claims out of most franchisors is like pulling teeth, some may choose to reveal this information, either officially or off-the-record. When you receive earnings information, how do you handle it?
- Carefully review the company's statements in Item 19 of the Uniform Franchise Offering Circular (UFOC). Here, the franchisor is required to describe the facts and assumptions underlying the earnings claim. It typically states whether the claim is based on actual experience as well as the percentage of franchisees operating during the specified period who actually attained or surpassed the claims.
At the end of all Item 19 earnings statements is a required disclosure that reads something like this: "Substantiation of the data used in preparing this earnings claim will be made available to the prospective franchisee on reasonable request." If you don't understand the earnings statement or if it doesn't strike you as realistic, request to see the substantiation. Make your request in writing, and don't expect an immediate answer. Under franchise law, you have a right to review the substantiation.
- Compare the earnings claim against information you've gathered from franchisees, or show it to them and ask if it's accurate in their experience. If it's exaggerated or doesn't represent the real results in the system, take that into account when evaluating the purchase.
- Are the statements made by the company's sales reps in accord with the Item 19 disclosure? If not, move cautiously, and confirm the information for yourself.
- If you come across a problem with the earnings claim, or you discover the franchisor has been disciplined in the past for its sales practices, you may want to review the earnings statement with a closer eye. Make a point of obtaining independent verification, like visiting with franchisees. What percentage of franchisees in the system have done as well as the stated claim? Is it a majority?
There is a movement among the franchise registration states to make the delivery of earnings performance information mandatory. The Federal Trade Commission has resisted this effort on policy grounds, setting up one of the more interesting policy debates franchising has seen in years. Observers don't expect this thorny issue to be resolved in the near future.