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.)
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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.
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