Knowing the profit potential for your business is an essential part of planning. We asked franchise attorney Andrew A. Caffey for the lowdown on calculating what kind of money you'll make with your franchise concept.
Entrepreneur: Is it legal for a franchise company to disclose earnings?
Andrew A. Caffey: It's legal, though not mandatory. Some franchisors provide this information and others choose not to.
What's the best way to find out how much money a potential franchisee will make?
The first and best source of information is the UFOC, if you're lucky enough to be dealing with any of the 20 to 25 percent of franchisors that [disclose earnings]. The second source is the franchisees in the system themselves. Even if a company doesn't provide performance information, it'll provide a list of franchisees. Contact a healthy sample of those franchisees and ask them how their businesses are doing-what their experience has been, how strong the training was, what the performance is like. Franchisees, if approached properly, are generally comfortable sharing that information.
The third reliable source is your own CPA, who's probably in the best position to review the prospective performance of a business. He or she can give you a pretty good idea of when the break-even points will be met and what sort of gross and net revenue a franchisee might expect.
What are the red flags to look for when you hear a franchisor's earnings claim?
If a franchisor delivers an oral [earnings] statement, as an informed prospective franchisee, I would expect to find that figure at item 19 of the UFOC, and I would review it and look at the limitations and the material assumptions that underlie it. If I receive an oral earnings claim and I don't find [the same figure] in the UFOC, that's a huge red flag.
What kind of salary can a new franchisee realistically expect to draw from a franchise?
That's an excellent question [to ask] existing franchisees and also to review with your CPA.