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 expect from a franchise?
A: Last month we discussed the history, the rules and the reasoning behind the FTC restrictions relating to franchises making earnings claims. This month, we'll go into more detail about a tried and true method you can use to get this information.
We mentioned that one of the best sources for gathering and/or confirming earnings information is the existing franchisees of any franchise system. This is a source you'll want to use to confirm the accuracy and clarify the scope of information in a franchise, even if they publish an earnings claim in their Uniform Franchise Offering Circular (UFOC). In most cases, you can get this information from existing franchisees, but you've got to be smart about how you ask.
If the first question out of your mouth is, "How much money do you make?" you're probably going to get an answer that is some variation of "none of your business." This is highly personal information, and they don't know you from a can of paint-for all they know, you could be a competitor.
Always start by asking questions about other subjects and spend some time building a rapport with the existing franchisee you're visiting with. Examples of these types of questions include:
- Training Programs. How well does the franchisor set up and train a new franchisee to have initial and ongoing success in operations?
- Opening Support. Did the franchisor make preparing your business for opening fairly easy?
- Marketing Programs. How effective were the franchisor's marketing programs in terms of creating initial and ongoing customer demand for your new business?
- Purchasing Power. How well does the franchisor take advantage of the buying power of the chain to save franchisees money in relation to ongoing supply purchases for the business?
- Relationships. How well do the franchisees and the franchisor get along?
- Total Typical Investment. What did it actually cost to get a unit up and running to the break-even point in terms of current operations? How did that number compare to the estimates in the UFOC?
These are all areas you'll want to get input on from the existing franchisees. Once these areas are covered, you'll have built a relationship, making it much easier to get into the income types of questions. The secret here is to work into it somewhat gradually.
Start by asking the franchisees for information about "systemwide averages." What is their understanding of typical gross sales and the various categories and amounts of the expense items? Then work into a discussion about net results in relation to profit and, even more important, cash flow. Remember you're asking about systemwide numbers.
Finally, ask how these numbers compare to their specific operation. Again, first sales, then expenses, then nets. You'll find that, most of the time, they've actually given you their own numbers when you asked about systemwide results. In any case, they'll usually give you at least a percentage variance factor that will let you easily extrapolate their numbers from the information you've already been discussing.
I think you'll find this approach works most of the time. After making a number of these calls, you should have a pretty clear idea of what's happening in relation to actual operating results in that franchise. This should give you enough evidence to know whether or not this franchise meets your earnings requirements at the unit level.