The first question that every prospective franchisee asks a franchisor is, “How much money can I make in this business ?” Since the FTC passed the franchise compliance rules in 1979, the most common answer to this question has been, “We can’t tell you because the FTC won’t allow us to.” This statement is simply not true and never has been. In the original 1979 FTC regulations governing the sale of franchises, the guidelines specifically allowed franchise companies to make what were called “earnings claims” as long as a specified set of rules was followed. In the revised FTC rules adopted in 2007, they again allowed for what they are now calling “financial performance representations” to be made by franchise companies under specified parameters. In fact, under the current rules, if a franchise company elects not to provide financial performance representations to a prospective franchisee, they must make a disclosure to the candidate stating that the FTC does permit them to do so in Item 19 of their Franchise Disclosure Document.
A company may make any financial representation it wants as long as it complies with the FTC rules, which aren’t really tough to meet. Most franchisors that publish an Item 19 disclosure provide at least basic sales revenue information because they already collect this data from their franchisees on their royalty payment reports. Some go further and provide basic cost-of-goods-sold data because it is fairly easy to determine and is usually pretty uniform among all franchisees. A few also provide specific information on typical expenses incurred by a unit, usually in fairly broad expense categories (rent, labor, etc.) in order to produce a typical gross margin or cash flow type of report. A very small number provide a full profit and loss income statement (usually from data on company-owned units) to provide as much information as possible. Even given the amount of flexibility that franchise companies are allowed in terms of the types of data they may present, it is estimated that only about 30 percent of them provide financial performance information to prospective franchisees as allowed under the regulations. The obvious questions are: 1) Why so few? and 2) What should it mean to you when a company chooses not to?
I can suggest five reasons why a franchise company might choose not to provide any financial performance information:
By Jeff Elgin