Q: I'm trying to determine exactly how much money I can make with a franchise company I'm investigating, but I'm having trouble getting the franchisor to answer this question. Every time I bring it up, they avoid the topic and mention something about the FTC having rules against sharing this information. Can this be right? How am I supposed to get this information? What is a reasonable level of income to get from a franchise?
A: This is one of the real quandaries of investigating most franchises. You're not about to invest until you know how much you can earn, and the franchisor probably has the best data to answer this question accurately, but they usually won't tell you a thing. I agree, it doesn't make much sense when you look at it this way.
The early days of franchise sales in the United States contained many instances of abuse, when unjustified or misleading earnings claims were used to sell franchises. In 1979, to try to stop any such bad practices, Congress passed legislation authorizing the FTC to regulate the franchise industry.
The current FTC rules do not forbid a franchise company from supplying information about the earnings that can be achieved in their business. They do, however, have stringent rules on how this information can be given to a prospective franchisee.
Basically, any franchise that wants to provide this information must put it in writing in its Uniform Franchise Offering Circular disclosure document, ensuring the data provided is as accurate and nonmisleading as possible and clearly labeling any assumptions or qualifications on the data provided. Assuming the franchisor meets these two requirements, they're free to provide whatever earnings information they want to a prospective franchisee in terms of sales, expenses, cash flow and income. Since it's this easy, it begs the question of why more franchisors don't do it.
The answer is twofold. First, producing an earnings claim involves effort and expense for the franchisor. Second, the results (given that they have to be accurate and nonmisleading) may not be attractive enough to assist in the recruiting of new franchisees. If that's the case, having the FTC to hide behind gives a ready excuse to keep this accurate data from prospective franchisees.
If a franchise does not provide an earnings claim in its UFOC, the best way to find out how much money you can make is by asking the system's existing franchisees. Make sure you select enough franchisees at random to get a clear idea of the averages and ranges for earnings in the system.
As for your final question about what to expect in terms of earnings, I think most experts would answer this question relative to the amount of the total investment required by the franchise. Though this is often not the case in franchising, you would probably expect the income to increase exponentially as the investment required by the franchise increases.
A good rule of thumb is that you can earn 10 to 15 percent on your money over time in a totally passive investment. Since most franchises require that you invest your time as well as your money, you should expect a return significantly higher than this level in order to justify the investment. This higher return will also offset the higher risk involved in this type of investment. You should look for earnings of at least 30 percent of your total investment on an annual basis to consider any franchise as having a reasonable return. You should expect to reach this level, at the latest, by the third year of operation of the business.