When looking into a franchise opportunity, one of the toughest pieces of information to get from the franchisor is how much money you might make.
This can be frustrating because you’re not going to invest in a business until you have a good idea of what you can earn. But in most cases the franchisor isn’t being purposely difficult.
The Federal Trade Commission and many states stringently regulate how franchisors can provide this information to prospective franchisees. But there are still ways to get this essential information.
Why is the government regulating franchisors?
There were many instances of abuse early in U.S. franchising history, particularly making unjustified or misleading earnings claims to sell franchises. Congress passed legislation in 1979 authorizing the FTC to regulate the franchise industry and try to stop bad practices. A number of states joined in.
Current FTC and state rules don’t forbid franchisors from giving earnings information to potential franchisees, but they do regulate how it can be done.
It must be put in writing in a Uniform Franchise Offering Circular (UFOC). The data must be accurate, not misleading, and any assumptions or qualifications must be clearly labeled as such.
Assuming it meets the legal requirements, a franchisor is free to provide whatever earnings information they want about sales, expenses, cash flow and income.
Why don’t all franchisors provide this information?
It sounds fairly simple, but many franchisors still don’t provide earnings claims. There are two likely reasons:
- It involves effort and expense for the franchisor.
- The results may not be attractive enough for new franchisees.
Where else can you find this information?
If a franchise doesn’t include earnings claims in its UFOC, the best alternative sources are its current franchisees. Call them and ask.
Item 20 of the UFOC provides a list of current and former franchisees and their contact information. You’ll be talking to many of them anyway as part of your due diligence, so be sure to ask about earnings averages and ranges.
By gathering performance statistics, you’ll have a realistic starting point for determining how much you can expect to make in a similar business.
What’s a reasonable level of earnings for a franchise business?
Once you have earnings data, your next question will be whether the probable earnings would be a good return on your investment.
Remember, when you invest in a franchise, you’re investing your time, talent and money. So you should look for a bigger return than you would for a passive investment of money only.
If a good return for a passive investment is 10-15 percent a year, you’ll want to see a greater return in a franchise. The time you put into your new business should yield a return at least equal to that on the money you invest – maybe not in the first year, but certainly down the road.
Also, a bigger franchise investment doesn’t necessarily mean a higher rate of return. There are plenty of low to mid-range investment franchises that provide great return on investments. Don’t limit yourself to high-investment franchises when looking for that business with a high ROI.
How much money you’ll make as a franchisee depends on many things, from the franchise structure (e.g. retail versus service) and how long your franchise has been open, to how well you understand and embrace the system, your enthusiasm for the business and how it will help realize your dream.
But with a little research, you can get enough information to decide if this opportunity makes financial sense for you.
