Understand Franchise Earnings Claims

Prospective franchisees are often surprised to find that most franchisors won't say how much money can be made with their franchises. It's not that franchisors are legally prohibited from providing any information about earnings potential (a myth repeated by some franchise salespeople and brokers). Many franchisors choose not to, and they have a host of reasons-some good and some not so good.

Every U.S. franchisor is, however, required to provide prospective franchisees with a disclosure document called the Uniform Franchise Offering Circular, which includes information about the franchisor and the franchise it's offering. If the franchisor has chosen to include earnings information in its UFOC, you'll find it in Item 19.

While the format and type of earnings claim information provided by franchisors, even those within the same industry segment, vary greatly, in general the UFOC has information on ranges of sales at their locations, information on costs, statistical data about operations and other important financial information. (Remember, though, that your location may not perform as well as others in a franchise system.)

Even if the franchisor provides you with detailed earnings information in Item 19 of the UFOC-and, more important, if they don't-you can use the information provided elsewhere in the document to help you estimate earnings. These include:

• Financial statements: Some franchisors offer their financial statement information on company-owned unit performance in Item 21 or as an addendum to the disclosure document.
• Structure of fees: Not every franchisor bases its royalties as a simple percentage of gross sales. Often their fees are based on formulas using other performance criteria. You'll find information about fees in Items 5 and 6.
• Investment: Item 7 of the UFOC provides information on how much you'll need to invest to become a franchisee. Typically, this includes an investment chart as well as information on staff size, types of locations, equipment or inventory-a gold mine of information from which you can build local projections.
• Other franchisees: Item 20 provides a list of current and former franchisees, with their contact information. Often the most accurate information about unit performance comes from franchisees actually operating locations. Put together a list of questions and call them.