How to Know if an Earnings Claim is Typical

If you'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.

Below are some critical things to consider to ensure that you're making an accurate assessment of the earning power you might have as a franchisee.

• Compare earnings claims carefully
• Determine if the earnings claim is historical or prospective
• Consider the context of the claim
• Look for footnotes that explain the calculation and data set
• Understand that location plays a major role
• Be aware that sample size and location of the sample size are important

“It's critical to determine if this is a historical presentation of data or a prospective presentation of data,” said Lee Plave, a franchise attorney with Reston, VA based Plave Koch PLC . “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's more theoretical. It's more of a 'we believe' this is what's possible as a franchisee. There is a big difference there, so it's important to interpret the data correctly.”

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.

“The earnings claim lays out the numbers,” said Kay Ainsley, Managing Director of MSA Worldwide , a franchise advisory group. “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'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's becoming a more common thing to see those earnings claims included.”

An earnings claim may also have another added benefit for a prospective franchisee.

“The claim generally makes it easier to get funding from a bank or to get a loan approved,” Ainsley added. “Bankers are looking closely at a potential franchisee'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.”