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Can companies predict your profits if you buy a franchise?

On Behalf of | Feb 27, 2020 | Franchise Law |

The short answer is no, a company legally cannot (and should not) say you will make a certain amount of money if you open a franchise under their brand.

But here is a more useful, if longer, answer. Some companies are more open than others when it comes to information that could help you make a fair estimate of what you might expect as a franchisee.

Even more useful, some studies suggest that the franchisees of companies that do provide this kind of information seem to have a better chance of staying in business longer.

Showing you certain financial data is optional

A columnist for Forbes took a close look at a sample of what Subway gives to its prospective franchisees before they sign on the dotted line. He did not like what he saw.

Federal law requires companies (franchisors) to supply a Franchise Disclosure Document (FDD) “at least 14 calendar days before the prospective franchisee signs a binding agreement.” This FDD is part of a rule so important to franchising agreements that the government calls it The Franchise Rule.

The Franchise Rule allows (but does not require) franchisors to give data about the past performance and projections of future performance of the franchisor or franchisee. If they do, they must also describe and support how they came up with these numbers.

Transparency and performance seem to go together

The Forbes columnist studied Subway’s “most recent” FDD, as of July of last year, and wrote that he considered it slim on useful financial performance information.

He points to a study of over 1,900 franchise systems from 2010 to 2016. Companies that did not give this kind of financial performance information lost locations by 0.2%. In contrast, depending on the exact data they included, companies that gave this data gained locations by over 13% or 18%.

Financial data showing up in more FDDs

Franchisors hoping to attract franchisees, Forbes said, soon took steps to appear more transparent, more trustworthy and a better bet. A market research firm reported that the number of FDDs with detailed financial information rose by 52% from 2014 to 2016. Close to all franchisees said they liked the change.

Forbes creates an annual list of the Best & Worst Franchises to Buy. They realized, apparently after making their 2019 choices, that every one of their top choices included this kind of data.