The FTC on Earnings Claims Statements

Are you considering buying a franchise? One of the first steps you ought to take is to determine whether that franchise is doing well or poorly financially, which involves determining what the franchise’s actual quarterly and/or annual earnings are.

The FTC gives franchises an opportunity to disclose franchisee earnings information via the Item 19 section of the UFOC (Uniform Franchise Offering Circular) document (soon to be termed “FDD: Franchise Disclosure Document”). Franchises are free to reveal anything it would like about income, sales and cash flow.

It should be understood, however, that the FTC does not in any way require franchises to disclose this financial information. Many franchisors take advantage of this fact, as they are hesitant about such disclosure. For example: what if individual franchisees have not done particularly well regarding income and earnings? How does that make the franchisor look to potential investors? As one can imagine, many franchisors would rather be safe than sorry and therefore choose to keep such information to themselves.

Luckily, you don’t have to rely on the franchisor to provide you with earnings information; should the franchisor refuse to disclose franchisee financials, you can turn to existing franchisees for answers. Though you should be as sensitive as possible so as not to offend, don’t be afraid to ask a given franchisee questions that will reveal what financial shape his/her business is in. Some questions you might want to ask are: How did the franchisor help the franchisee get the business up and running? What kind of marketing tactics did the company have in place for creating interest in the franchisee’s location? What supply purchasing strategies did the franchisor employ? Were those strategies notably beneficial to the franchisee?

Through these initial questions you ought to lead up to the big question: How much did it cost and how long did it take for the franchise to break even financially? You also want to know how knowledgeable the franchisee is of the franchisor’s overall profits, and how closely the franchisee’s figures ultimately resemble the franchisor’s original profit projections.

If you proceed carefully and respectfully, you should be able to glean some invaluable information that will either make or break your commitment to joining a franchise team.