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 Item 19: Earnings Claims

Earnings claims statements are covered under Item 19 of both the FTC and state 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.