Franchisors often get asked financial questions from people interested in a franchise such as “What will be my return on investment (ROI)?” or “How much money can I make?” The only true response a franchisor should make is “I don’t know!”, as the financial performance of any particular franchise depends on numerous factors including location, the franchisee's motivation and involvement, and their business and management skills.
In part one of this three-part series, we looked in detail at adjusting financial expectations. This time, let’s consider how a franchisee might calculate the potential earnings – and the disclaimers that go with such information.
The dangers of earnings projections
Some franchisors supply qualified candidates with a template that enables the candidate to enter their own estimates of revenue and expense and develop their own business plan. The template includes formulas to calculate known variables.
This leads us to why franchisors are unwilling to provide projections or earnings claims. This is an area where franchisors must be very careful as they open themselves up to potential future litigation if they provide earnings claims to prospective franchisees that they don’t attain.
Naturally, potential franchisees need to know what the franchised business might be able to generate, and franchisors tend to deal with this in different ways. Once a candidate has gone through the pre-qualification process they may allow a prospect to talk to current franchisees in the system and ask what about their individual performance. Naturally, some franchisees are reluctant to provide this type of information as it may be considered personal.
Other franchisors may give you “historical” information – i.e. what their corporate and/or franchised units have done in the past. This may be presented as “actua” performance or as a range of earnings broken down in various categories (e.g. time in business, or low, medium and top performers as a percentage of the total).
This type of information will undoubtedly be accompanied by a disclaimer such as:
“These projections are for illustration purposes only and in no way represent actual or potential sales volumes, expenses or profit that can be achieved by a franchisee at any location. There is no warranty or guarantee that these projections reflect actual performance which depends on numerous factors including the franchisee's business and management skills.”
Disclosure documents and disclaimers
Where the franchisor is required to comply with provincial franchise laws, such as those in British Columbia, Alberta, Manitoba, Ontario, PEI and New Brunswick, they are required to state in their disclosure document if they provide an earnings projection for the franchise, either directly or indirectly. If an earnings projection franchise is provided, the franchisor must specify the reasonable basis for the projection, the assumptions underlying the projection and a location where information is available for inspection that substantiates the projection.
If you do live in these provinces, or are planning to invest in a franchise in a different province, but the franchisor is awarding franchises in any of these provinces, you can request a copy of their disclosure document. Typically, the franchisor will voluntary provide you with their disclosure document on the understanding that you will not be relying in any way on the information and/or documents contained therein. Further, if the franchisor is a member of the Canadian Franchise Association (CFA), they are required to provide you with a copy of the CFA disclosure document.
Most disclosure documents contain a disclaimer such as:
Neither us, or any of our associates or affiliates furnishes or authorizes its salespersons or agents to furnish any oral or written information concerning the actual or average or potential sales, costs, income, earnings or profits of the franchised business. Actual results may vary substantially from location to location and from area to area and from franchise to franchise and we cannot estimate the results of any particular franchisee or location. Actual results may also differ in respect of a franchised business or a company owned and operated business.
Where we, or any of our associates or affiliates do discuss or furnish any oral or written information concerning the actual or average or potential sales, costs, income, earnings or profits of franchises, such information would be given by way of feedback to a particular prospective franchisee, after reviewing any potential business or financial plans presented by the franchisee for discussion purposes. The purpose of furnishing such information and feedback would be to provide prospective franchisees with general information and only to assist prospective franchisees in working with their own independent advisors, to make their own financial decisions regarding the purchase and the operation of a franchised business as contemplated thereby.
We strongly recommend that all prospective franchisees obtain their own independent financial and legal advice from their own advisors who will assist the prospective franchisee to develop its own pro forma financial operating projections. We make no representation or guarantee to any prospective franchisee with respect to estimated or projected income, earnings or profits or any other financial performance matters.
Part three: The difference in performance between company units and franchise units, what you can learn from current franchisees, where to find them, when to approach them and what you can ask them.