What is an Earnings Claim?
The single most important
factor in buying a franchise - or any business for that matter - is determining
a realistic and supportable projection of sales, expenses and profits. Specifically,
how much can you expect to earn after working 65 hours a week for 52 weeks a
year? A prospective franchisee does not have the experience to sit down and
project what his or her sales and profits will be over the next five years.
This is especially true if he or she has no applied experience in that particular
business. The only source in a position to supply accurate information about
a franchise opportunity is the franchisor itself.
In 1979, the Federal Trade Commission
(FTC) adopted what is known as the "FTC Rule." Titled "Disclosure Requirements
and Prohibitions Concerning Franchising and Business Opportunities Ventures,"
the rule requires all franchisors to prepare and distribute a disclosure document
or Offering Circular according to a format prescribed by the FTC. The document
must be delivered to any prospective franchise buyer prior to the signing of
any contract.
UFOC/FDD Item 19: Earnings
Claims
Earnings claims statements are covered
under Item 19 of both the FTC and state Franchise Disclosure Documents (FDD)/Uniform
Franchise Offering Circular (UFOC) requirements. In their broadest sense, earnings
claims are defined as estimates or historical figures detailing the level of
sales, expenses and/or income a prospective franchisee might realize as the
owner of a particular franchise. However, the earnings claims statement is voluntary
and unverified, and the information's format and level of detail are left completely
to the company's discretion. Neither the FTC nor state regulatory agencies checks
the document for accuracy or completeness.
The only requirement for any Item 19
is that the franchisor has a "reasonable basis" for the earnings claim at the
time the statement is prepared. Few specifics and less guidance are provided
to prospective franchisees, who are largely left to their own devices.
Still, you can learn a great deal by reviewing earnings claims. Most importantly, identifying the sales and costs that would be relevant to your own business, as well as to your skills and your experience, is invaluable. Do not be swayed by the profit margin alone, as you should also consider the cost side of the equation, such as the cost of sales, payroll costs, operating expenses, and rent and occupancy costs. Furthermore, you should also note that the historical data used as the basis for the claims do not apply to every geographic region, individual location or franchisee, whose experience and business acumen may vary. Earnings Claims Availability Because publication of an earnings claims statement is at the sole discretion of franchisors, only about 15-20% provide this information. In the vast majority of cases, a franchisor will simply leave Item 19 blank. UFOCs.com makes every effort to provide all available earnings claims statements, in their entirety, to the public. Please access our list of companies for which we have Item 19: Earnings Claims or choose from our pre-selected industry packages.
Sample Earnings Claims Here are some detailed and informative
examples of earnings claims statements. The files below are in PDF format. You
must have Adobe
Reader to read these files.
When ordering an earnings
claims statement(s), please keep in mind that franchisors who choose to publish
a statement are free to use whatever format they want in presenting the information.
The only requirement is that the franchisor must be able to substantiate the
data. Accordingly, statements range anywhere from one page to 15 pages in length.
There is no guarantee that an earnings claims statement you select will be similar
in format to the ones presented here. The samples above are meant to give a
general idea of the information offered and of how varied a statement can be.
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