Financial Performance Representations

In over 30 years of franchise consultant experience, people frequently ask me, “Can I give out financial projections to prospective franchisees?”

The answer is yes, if the earnings claims are compiled correctly and included in Item 19 of the company’s FDD (Franchise Disclosure Document).

The FTC (Federal Trade Commission) is the federal agency that oversees franchising.

The FTC permits a franchisor to provide information about the actual or potential financial performance of its franchises and/or franchisor-owned outlets, if there is a reasonable basis for the information and if the information is included in the FDD.

The FTC’s definition of an earnings claim is broad. Earnings claims include any representation — written, oral or visual to a prospective franchisee, including information in the media — which states, expressly or by implication, a specific level or range of actual or potential sales, income, gross profits or net profits.

Earnings claims also include tables, charts or mathematical calculations that show possible results based on a combination of variables.

The definition of an earnings claim further states financial performance information that differs from that included in Item 19 may be given only if a franchisor provides the actual records of an existing outlet that the franchisor is considering selling.

The franchisor may also supplement the information provided in Item 19, for example, by providing information about possible performance at a particular location or under particular circumstances.

The earnings claim must have a “reasonable basis” at the time the information is shared. Also, the franchisor must have written substantiation and make it available to prospects, upon request.

Some examples of earnings claims are:

  • Entrepreneur Magazine reports that gross sales for an average franchise unit are over $20,000 per week;
  • Most of our franchisees take home $2,500 a week;
  • During the first year of operations, the franchise will achieve a 100% ROI (return on investment);
  • You can anticipate annual sales of $750,000 a year with a profit margin of 30%.
  • A franchise typically breaks even in 18 months; and
  • In the first six months, you can earn enough money to buy a Porsche.

As you can see, if you give any financial information to a potential franchisee about sales or profits you have made an earnings claim. While many franchisors do give out earnings claims, due to the potential risks involved, the majority do not.

In future blogs, we will address the Pros and Cons of offering earnings claims as well as the legal, financial and sales implications.

How Do You Sell Franchises?

In over 30 years of franchise consultant experience, people frequently ask me, “Why does one franchise sales program flourish while another franchise sales program disappoints?”

There are many causes for succeeding or failing in your franchise sales program.

In this franchise consultant blog, I will address another Frequently Asked Question about franchise sales programs and franchise consultants:

Q. How do you sell franchises?
A. Usually, you have three choices for the party responsible for your franchise sales program:

  • Designating one or more of the owners of the franchisor as the franchise sales team,
  • Retaining an outside company or sales person to perform your franchise sales, or
  • Appointing or hiring a staff person to perform inside franchise sales.

There are pluses and minuses to each of these alternatives for your franchise sales program. At the outset of your franchise sales program, if the owners of your business are willing and able to perform the franchise sales function, they are often the best solution for the following reasons.

  • Being the people most knowledgeable about the franchise company may put them in the best position to sell it.
  • In the beginning of franchise operations, the franchisor’s owners are essentially convincing others to invest in them. Personally filling the franchise sales role puts these owners in the best position to earn the prospective franchisees’ trust and respect.
  • Unless its first few franchisees are successful, it is virtually impossible for a franchisor to sell more franchises. By allowing the franchisor’s owners to spend more time with prospective franchisees, they can better judge if these are top quality candidates.
  • This option keeps your franchise sales costs lowest at the time when the company has little revenues.
  • Unlike many outside brokers, the owners can concentrate on franchise sales for their company alone.

If the owners of the franchise company are unwilling or unable to perform the franchise sales function, the franchisor can always bring in an inside franchise sales person or outside franchise sales broker.

(More in my next blog)

Cutting Corners In Franchising, Wise?

In my over three decades as a franchise consultant, I am often asked “What makes one franchise program succeed while another franchise doesn’t?” Rarely is there a single reason for success or failure in a franchise program. In my franchise consultant blogs, I will examine some of the factors that can help you succeed in your franchise program.

In this month’s franchise consultant blog, I will continue tackling franchising FAQs:

Q. Why can’t I just get somebody else’s franchise legal documents and substitute my company name?

A. You certainly can do so. However, as most experienced franchise consultants will tell you, what works for one franchisor does not necessarily work for another. There are a number of business decisions (not necessarily legal issues) that must be addressed when developing a franchise program. Carefully working through these issues results in a franchise program that is both more lucrative and easier to attract qualified franchisees. The following are just a few of these issues:

  • Size of the franchise territory
  • Amount of the Initial Franchise Fee
  • Amount, frequency and basis for determining the royalty or service fee
  • Initial training program provided to franchisees
  • Mandatory/optional purchases from the franchisor
  • Franchise growth strategy

A seasoned franchise consultant can guide you in making the best possible decisions for your particular business and goals.

Remember, depending upon the specifics of your franchise program and the fees charged by the particular franchise consultant, you can easily recoup your investment in developing your franchise program with the Initial Franchise Fee and first year of royalties from the sale of only one franchise.

Q. How large is franchising?

A. Recent industry estimates are that franchising accounts for nearly 50% of the U.S. retail economy.

(More in my next blog)