I received an email from Source Book Publications regarding Earnings Claim in Item #19 of the UFOC, I agree with Sourcebook that all franchisors should be required to submit an earnings claim statement (Item 19) in their UFOC. Given that submission of an Item 19 is entirely voluntary, only 20% of franchisors choose to do so. The reasons for non-submission range from the ludicrous to vaguely plausible.

To myself and Sourcebook, it seems entirely one-sided to ask a prospective franchisee to invest in excess of $200,000 (on average) to “buy” a franchise without providing him or her with a clear understanding what he or she might earn from the investment. Although there are numerous variables that preclude franchisors from coming up with an exact projection of future Net Operating Income, the franchisors clearly have the ability to determine the historical sales and related expenses for operating units currently within their system. At a minimum, they can work backwards from royalty payments to come up with a gross sales figure. To the extent that they closely monitor and support their franchisees, they should have a good sense of average operating costs as well. Given this information and the latitude they have to provide as much detail as they see fit, they can break out summary operating data for those franchisees or company-owned units that have been around for say 5 years, 10 years, etc.

So here is the controversy in a nutshell. Now, to me, it is also perfectly reasonable that someone who is investing $200,000 in a franchise demands some financial proof of the claims that the franchiser is making. Wouldn't you think that's just good sense?

So why does the FTC have to mandate this? Don't people putting in this kind of cabbage into a deal possess the common sense to demand this data anyway?

You know, a franchise is a negotiation. It's not take it or leave it. The prospective franchisee should remember that. Each deal can be different and each party can say "sayonara" and back away from the negotiating table at any time.

It's a free country, kinda, and I don't want more mandatory intrusions into this type of contractual vehicle. That's how I feel about it and I'm sticking to my guns on this one.

Okay, so let's just read a bit more of what Jim says:

My sense is that the FTC will ultimately acknowledge the need for a mandatory Item 19. Given the difficulty from industry to industry to provide a workable template for the submission of information, the FTC will continue to allow franchisors to provide as much or as little information as they deem necessary. Those franchisors that do in fact provide real, in-depth information will clearly enjoy a competitive advantage over those that do not. At any rate, those franchisors that go to the trouble of including an Item 19, even if only cursory, should be acknowledged and applauded.

Well, if a franchisor wants to disclose this stuff, good for them! I agree with Jim that we should applaud them. Moving right along, it's your job to find something you like and then check it out like crazy.

No amount of earnings claims will make up for poor market research on your part. You need to investigate every franchise that tickles your fancy by doing your own homework. If you aren't gonna do that, then you shouldn't part with your hard earned money either.

(Meanwhile, if financial franchises interest you, read this article about financial franchises. I won't make any earnings claims but I do think that the article deserves to be read if you have an interest in financial franchises of any kind. Especially if you are, say, a mortgage broker looking to become less broke )