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.
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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.
Jeff Elgin has almost 20 years of experience in franchising,
both as a franchisee and senior franchise company executive. He is
currently the CEO of FranChoice
Inc., a company that provides free consulting to consumers
looking for a franchise that best matches their needs. He can be
reached at jelgin@FranChoice.com.
The opinions expressed in this column are those
of the author, not of Entrepreneur.com. All answers are intended to
be general in nature, without regard to specific geographical areas
or circumstances, and should only be relied upon after consulting
an appropriate expert, such as an attorney or
accountant.