1851

Hand a prospective franchisee a copy of your Franchise Disclosure Document (FDD), and they&rsquo;re likely to flip quickly to see if one section is included: the Item 19. After all, what franchisee wouldn&rsquo;t want to know how much money they could make with your franchise?

If you&rsquo;re a prospective franchisee, the answer to that question can be complicated. While a franchisor may (likely will) tell you that their franchise has high earning potential, you should always do your own research before investing money. If you find an Item 19 in the FDD you&rsquo;re looking at, and then also find an earnings claim, how can you really be sure that it&rsquo;s reflective of the real amount you might earn as a franchisee? After all, there are a lot of variables to contend with.

Below are some critical things to consider to ensure that you&rsquo;re making an accurate assessment of the earning power you might have as a franchisee.

Is History an Indicator?

Though it may be tempting, comparing one earnings claim to another is not &ldquo;apples to apples,&rdquo; even if the FDD is for a similar business or in a similar industry.

&ldquo;It&rsquo;s critical to determine if this is a historical presentation of data or a prospective presentation of data,&rdquo; said Lee Plave, a franchise attorney with Reston, VA based <a href="http://plavekoch.com/?utm_source=1851franchise.com&utm_medium=article&utm_campaign=how-to-know-if-an-earnings-claim-is-typical-2703167" target="_blank" rel="nofollow" target="_blank">Plave Koch PLC</a>. &ldquo;A historical presentation can be useful to see where the franchise system has been. A prospective, on the other hand, can be useful too, but it&rsquo;s more theoretical. It&rsquo;s more of a &lsquo;we believe&rsquo; this is what&rsquo;s possible as a franchisee. There is a big difference there, so it&rsquo;s important to interpret the data correctly.&rdquo;

A Reasonable Basis

It&rsquo;s important to remember that franchisors are not required to make an earnings claim. But, if they do, the Federal Trade Commission requires that they have a reasonable basis for their claims.

Despite that protection, it&rsquo;s still critical for franchisees to understand the context in which the claim is made. For example, does the earnings claim list gross sales, devoid of operating costs? If it does, then things like operational costs, start-up fees, and royalty payments will come out of that figure. The franchisor may also list just the franchises with the best revenues, and not present an overall average revenue figure. Location also plays a major role.

&ldquo;Footnotes can offer lots of additional information that can help explain exactly how the performance representation was calculated and what made up the data set or sample size,&rdquo; said Kay Ainsley, Managing Director of <a href="http://www.msaworldwide.com/?utm_source=1851franchise.com&utm_medium=article&utm_campaign=how-to-know-if-an-earnings-claim-is-typical-2703167" target="_blank" rel="nofollow" target="_blank">MSA Worldwide</a>, a franchise advisory group. &ldquo;Footnotes can help explain things like where the units referenced are located. That can mean a lot in some industries, like restaurants, for example. Are the referenced locations in a mall space? Are they freestanding? Are the inline? What is the square footage of those locations? Are the Average Unit Volumes (AUV) of those locations corporate or franchise owned? The sales expectations can vary wildly from location to location in those scenarios.&rdquo;

Just because someone in one town makes a certain amount of money from the franchise, doesn&rsquo;t mean that you will make the same. The FDD should give you the sample size and the location of the sample size.

Setting Expectations

Franchisors may ask you to sign a statement saying you received an earnings claim. If that request happens, even verbally, you should ensure you record it. Failing to do so could result in waiving your rights to claims in a potential future lawsuit.

For that reason, the earnings claims can actually serve as a protection to a franchisor.

&ldquo;The earnings claim lays out the numbers,&rdquo; said Ainsley. &ldquo;It shows what it possible, and sets expectations on both sides and gives protection on both sides. The franchisor says: we back this, because this is what we put in writing. The most recent study I&rsquo;ve seen says that 60 percent of franchisors do include some earnings claim in an Item 19. That could be a full P+L, just topline sales, cost of goods sold, or some other combination, but it&rsquo;s becoming a more common thing to see those earnings claims included.&rdquo;

An earnings claim may also have another added benefit for a prospective franchisee.

&ldquo;The claim generally makes it easier to get funding from a bank or to get a loan approved,&rdquo; Ainsley added. &ldquo;Bankers are looking closely at a potential franchisee&rsquo;s prospective business plan. When bankers can see that those numbers are in line with what the franchisor sees as possible, or what other franchisees are experiencing, they are much more likely to approve the loan.&rdquo;

How to Know if an Earnings Claim is Typical

1851 Franchise

There are a few steps prospective franchisees can take to ensure that they're getting an accurate assessment of the earning power behind a franchise.

how-to-know-if-an-earnings-claim-is-typical

Express Employment Professionals

Shaping the Future of Work: Melissa Davis Leads the Charge in Express Employment Franchising

shaping-the-future-of-work-melissa-davis-leads-the-charge-in-express-employment-franchising

Caring Transitions

The Benefits of Buying an Existing Caring Transitions Territory vs. Starting From Scratch

the-benefits-of-buying-an-existing-caring-transitions-territory-vs-starting-from-scratch

petbar

petbar Franchise - Marc Hildebrand - Nicole Baptiste - San Antonio - 1851 Franchise

Spreading Bark-Side Joy: How Nicole and Marc Bring Trust and Canine Bliss to San Antonio

petbar-franchise-alamo-heights-san-antonio-nicole-baptiste-marc-hildebrand

Wild Bill's Craft Beverage Company

How Wild Bill’s Craft Beverage Co. Built a 23-Year Brand That Empowers Veterans Through Franchising

wild-bills-craft-beverage-co-veteran-franchise-opportunity

Comfort Keepers

Comfort Keepers Franchise - St. Louis Expansion - 1851 Franchise

Why St. Louis Is the Next Major Growth Opportunity for Comfort Keepers®

comfort-keepers-st-louis-franchise-opportunities

Buying a Franchise Masterclass

 Franchise Opportunities

Get Support Buying a Franchise

How to Buy a Franchise White Paper

How to Buy a Franchise

How to Sell Franchises

How to Grow a Franchise

Find a Franchise Supplier

1851 Franchise Opportunities

Franchisor News

Franchisor Power Rankings

FranCamp Mastermind Summit

Franchise Development Website Builder

Franchise Resources

What ALEC-Laffer's Report Means for Franchising

Website Awards

Power Rankings

About 1851

Advertise on 1851

Contact 1851 Editorial

Terms of Use

1851 Login

GROWTH CLUB LOGIN

facebook

instagram

twitter

linkedin

youtube

Photo of Papa Murphy's Take 'N' Bake Pizza franchisee Lily Wilford

Entrepreneur: This 18-Year-Old Saves Babysitting Money for College — Then Decided to Buy a Business Instead

18-year-old-franchise-owner-lily-wilford

Amazon outage, AWS outage, Amazon AWS logo

The Day the Cloud Stalled: How Amazon's Outage Impacted Franchise Economy

amazon-aws-outage-franchise-impact-travel-dining-failure

Thursday 1851 Franchise Agg - NASAA’s Noncompete Push

NASAA’s Noncompete Push Puts Franchise Growth on Uncertain Ground

franchise-noncompete-nasaa-advisory-reasonableness-standard

How a Steady Economy Could Help Franchisors Plan Their Next Move

how-a-steady-economy-could-help-franchisors-plan-their-next-move

Bed Bath & Beyond - Franchise Expansion - Retail Strategy - 1851 Franchise

Bed Bath & Beyond Launches Franchise Model as Part of Comeback Strategy

bed-bath-beyond-franchise-expansion-retail-strategy

image of franchise deep dive from 1851 franchise on doody calls franchise authority brands

DoodyCalls Franchise Costs, Fees, Profit and Data for 2025

doodycalls-franchise-deep-dive

image of mellow mushroom deep dive into financials article from 1851 franchise

Mellow Mushroom Franchise Costs, Fees, Profit and Data for 2025

mellow-mushroom-franchise-deep-dive

Photo of Humbug Holiday Lighting team members wearing festive sweaters, beanies, smiling at camera

Happinest Brands Turns the ‘Off-Season’ Into a Bright Spot for Franchisees

happinest-holiday-lighting-franchise-support

EarthWise Pet Franchise Costs, Fees, Profit and Data for 2025

earthwise-pet-franchise-costs-fees-profit-and-data

A Practical Playbook: Who To Call First When Franchising Your Business

franchising-your-business-who-to-call-first

image of jerome hanway from right at home Las Cruces, New Mexico 1851 franchise franchisee spotlight

Jerome Hanway Is Building His Right at Home Franchise Around His Mission To Serve

right-at-home-franchise-las-cruces-jerome-hanway

NJCAR v. Ford - New Jersey Supreme Court Limits Standing Under Franchise Practices Act

New Jersey Supreme Court Limits Standing Under Franchise Practices Act

new-jersey-franchise-practices-act-njcar-v-ford

graphic image of an 1851 franchisee spotlight brayden and johnny steven of teriyaki madness

Father-and-Daughter Team Bring Teriyaki Madness to Wichita, Kansas, With Big Expansion Plans

johnny-brayden-steven-teriyaki-madness-wichita

Top Education Franchises To Consider for 2025 - 1851 Franchise

Top Education Franchises To Consider Investing In for 2025

top-education-franchises-investment-opportunities

How to Know if an Earnings Claim is Typical

MORE STORIES LIKE THIS