In investigating a franchise  opportunity, one of the most difficult pieces of information to get from the franchisor is how much money you might make. This may be frustrating because you are not likely going to invest in a business until you have a good idea of what you can earn.

In most cases, the franchisor is not being purposely difficult. The Federal Trade Commission (FTC) and many individual states have stringent regulations as to how franchisors can provide this information to prospective franchisees. However, there are ways to get this essential information.

Why is the government regulating franchisors?   

Early in U.S. franchising history, there were many instances of abuse, particularly where unjustified or misleading earnings claims were used to sell franchises.  In 1979, Congress passed legislation authorizing the FTC to regulate the franchise industry to try to stop any such bad practices. A number of states also passed similar legislation. The current FTC and state rules do not forbid a franchise company from supplying information about the earnings that can be achieved in their business. They do, however, regulate how this information can be given to a prospective franchisee. 

A franchise that wants to provide earnings claims must put it in writing in their Franchise Disclosure Document (FDD).  Also, it is essential for the franchisor to make sure that the data provided is accurate and not misleading, and that they clearly label any assumptions or qualifications on the data provided. 

Assuming they meet the legal requirements, a franchisor is free to provide whatever earnings information they want to a perspective franchisee in terms of sales, expenses, cash flow, and income. If provided, you'll find this information in Item 19 of the FDD, under the heading of "Financial Performance Representations."

Why don't all franchisors provide this information?       

It sounds relatively simple, but there are still many franchisors that don't provide earnings claims. There are any number of reasons a franchisor may not provide Item 19 information, including:

First, producing an earnings claim does involve effort and expense for the franchisor.  Second, the results may not be attractive enough to assist in the recruiting of new franchisees.  Third, the franchise system may be young and does not yet have a track record that will show potential earnings. A fourth reason for eliminating this information from the FDD may be that the franchisor has changed the business model and past results my not be indicative of what the current model may bring franchisees in compensation going forward.

If the information is provided, consider yourself fortunate. However, if it is missing, there are other ways to find out how much money can be made from a franchise.

Where else can you find this information?

If a franchise does not provide an earnings claim in their FDD, the next best source of information is the existing franchisees of the system. Call them and ask. Item 20 of the FDD provides a list of current and former franchisees along with their contact information. You will be talking to many franchisees as part of your due diligence so make sure you also cover the subject of the averages and ranges for earnings in the system. By gathering actual performance statistics, you will have a realistic starting point in determining how much you can expect to make in a similar business.

Hopefully, you are aware that there are many other factors that can affect what your individual business will earn, particularly in the beginning. These factors can include the timing of the opening of your business, the location you've chosen, various expenses you've incurred along the way, etc. Costs for various items such as materials and supplies, advertising, and the building lease can vary significantly from place to place. Therefore, be sure you have more capital than you think you will need to start your business and build in some extra time before you expect your business to start making a profit.

Once you have earnings data, your next question will be whether the probable earnings represent a good return on your investment.

What's a reasonable level of earnings for a franchise business?    

Remember that when you invest in a franchise, you’re investing your time, talent, and money. Therefore, you should reasonably expect a greater return than you would for a passive investment of money only.

If a good return for a passive investment, such as a stock portfolio, is 10 percent to 15 percent per year, you will want to see a greater return in a franchise opportunity. After all, the time you put into your new business should yield you a return at least equal to the return on the money you invest, maybe not the first year but certainly down the road.

A second important point to consider is that a higher franchise investment does not  necessarily mean a higher rate of return. While this seems contrary to common knowledge, there are plenty of low to mid-range investment franchises that provide great return on investments. Don’t limit yourself only to high-investment franchises when seeking that business with a high ROI.

How much money you will make as a franchisee depends on many factors—from the structure of the franchise (e.g., retail versus service), to how long your franchise has been operational, to how well you understand and embrace the system, to your enthusiasm for the business and how it will help you realize your dream. But, with a little research, you can get enough information to decide if this opportunity makes financial sense for you.