Franchise Opportunities and Income

Franchise Opportunities and Income

This is the age old question asked by every potential franchisee in the initial stages of investigation. Unfortunately there is not a one-size-fits-all answer … and there never will be. Here’s why.

First, the FTC (Federal Trade Commission) regulates the nature of franchise disclosure and prohibits franchisors from discussing “financial performance” unless they are supported by very specific language in the franchisor’s disclosure documents (the FDD or Franchise Disclosure Document). For a number of reasons, including the fact that franchisees in certain systems don’t fare too well, it is estimated that under 30% of all franchise companies publish data on financial performance.

Next, investigation beyond disclosure requires interviews with existing franchisees, and that is difficult unless the interviewer gains the time and confidence of the particular franchisees approached. (How likely is anyone going to give personal information to a stranger?)

So, you see that it is not an easy question to answer, and many franchisors actually love the idea that it is difficult. Some even blame the government for their inability to discuss income.

Getting income information on franchise opportunities.

While there is no evidence that the sellers of franchise opportunities will be required to publish franchisee performance information, you might consider asking if a franchisor offers an FPR (financial performance representation) before you proceed. However, even if the answer is ‘yes’, it is often difficult to use the information they present. Why? Because the data can be of little value. For example, instead of stating that 20% of units ‘X’ years old had gross sales of ‘Y’, you might be told that the average cost of goods sold is ‘Z’. Well, that piece is part of a business plan, but not a good starting point.

Obtaining ‘earnings’ information on a franchise opportunity is difficult at best, unless you are buying an existing franchise with tax returns in place, or having access to a trusted advisor who is already in the system.

There is so much to say on this subject, but the sad note is there is no easy way. Get a good advisor (consultant/accountant) to help investigate and piece things together. Oh, and you should know that ‘once a franchise agreement is signed’ the franchisor can tell you all the facts you want.

Investigate fully before you buy into franchise opportunities so there will be few, if any, surprises when the truth comes out.