A few things in franchising need to change.
I’ve offered my suggestions before.
I’ll continue to do so; I’ll even write about Item 19 earnings claims.
You’ll benefit from them.
So will the franchise industry.
Bold Letters
In bold letters-right on the top of one franchise website:
“Avg. Annual Revenue of Franchisees Open 3 Years = $231,497”
Looks good-I’d love to make $230,000 a year. Wouldn’t you?
Of course, I have no idea if I’m even a good fit for a franchise that specializes in making homes that are for sale look nice. But, who cares if I don’t have an eye for interior design? Look how much darn money I’ll make!
The middle portion of their website has some nice graphics including awards they have won, and a couple of videos. Giddy franchisees are also pictured.
Then, in microscopic font-on the bottom of their website:
“The ‘Avg. Annual Revenue of Franchisees Open 3 Years’ is the average annual revenue for the year ended December 31, 2012 for franchisees in continuous full-time operations for 3 full years as of December 31, 2012. There were 25 franchisees in operation for 3 years as of December 31, 2012 who operated in 39 territories. The average annual revenue is based on information received from 15 of those franchisees who operate in 25 territories because the remaining 10 franchisees were not in continuous full-time operations during the entire 3 year period. Of the 15 franchisees, 7 franchisees (41%) met or exceeded the average annual revenue. There is no assurance you’ll do as well.”
Go ahead. Read it over. I’ll wait.
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The Next Franchise
Chem-Dry, a carpet cleaning franchise, displays the following Item 19 earnings claims on their website:
$250,297- Average annual revenue per franchisee
$111,184- Average annual revenue per franchise
$20,858- Average monthly revenue per franchisee
That information is also bolded and it’s front and center on the “How Much Money Can I Make” section of their website.
Underneath that section-in normal font:
“We surveyed all of our franchisees (1,082 franchise owners operating 2,039 franchises) and received responses from 211 franchise owners who operate 475 franchises.
Average annual revenue per franchise owner: $250,297 (70 of 211 franchise owners, or 33 percent, exceeded this average)
Average monthly revenue per franchise owner: $20,858 (70 of 211 franchise owners, or 33%, exceeded this average)
Average annual revenue per franchise: $111,184 (66 of 211 franchises, or 31%, exceeded this average)
For more information, see Item 19 of our Franchise Disclosure Document. Your results are likely to differ from the results described above and, for a number of reasons, these results should not be considered as the actual or probable results that your Chem-Dry business will realize.”
Once again, read their earnings claims over again if you’d like.
Go ahead: Read the Item 19 earnings claims from those two franchisors…their financial performance representations-again and again. Over and over until your eyes hurt…over and over again until the electrical activity going on in your brain reaches its peak.
Not that it matters.
It Doesn’t Matter
I don’t care if a franchisor provides Item 19 earnings claims…earnings information.
And, you shouldn’t either.
You need to ignore the earnings claims and revenue figures that are being displayed online by more and more franchisors.
You don’t need to know how much you’ll make as a franchise owner.
Well, not yet.
That’s because owning a franchise can’t be just about the money.
Let me rephrase that; it shouldn’t be just about the money.
I’ll show you why.
Making Big Money
It’s fine if you want to become a franchise owner-and make big money.
Joe Stokar, one of my early mentors, once told me that “profit isn’t a dirty word.”
Do you agree?
And if you’re willing to risk some of your own money in order to be your own boss, I’m assuming that you’re not looking at your new venture as a non-profit opportunity.
But, if you’re only doing it for the money, your potential 12-15 hour days are going to get real old real fast.
Really Joel?
Really.
Clicking Around
Let’s say that you’ve started searching online for a few franchise business opportunities to explore. You start clicking around, and end up locating 5 opportunities that seem interesting.
You read through a few pages on each the franchise websites, and like what you see. Three out of the 5 franchises that you’re interested in even display their franchisees average revenues-in bold font.
Average revenues- $345,230
Average revenues- $228,900
Average revenues- $550,125
Out of the three, which franchise opportunity will interest you the most?
That’s the problem.
The franchise marketing departments that are engaged in advertising those earnings claims-right on their franchise websites-are taking your brain hostage. They are trying to force you to buy their franchises their way. Their way is based on the average revenue-from a sampling of their franchisees.
But, that’s not how to buy a franchise.
You need to do it your way.
You need to take control of the process…in your head-and when you’re interacting with the franchise salesperson.
That’s because choosing one franchise concept over another one-just because you can “make more money” is going to end up biting you right in the…
You’re Not Really Making More Money
Don’t confuse revenue with profit.
They’re not the same.
Revenue is the amount of money that’s brought in by your franchises business activities.
Profit is the money that your business makes after accounting for its expenses.
Your expenses are going to different from every other franchisee in the system.
That’s because costs for things like real estate, taxes, equipment are going to be different in different parts of the country. In addition, your small business loan rate is going to be different-and that makes your expenses different that the other franchisees who may or may not have a loan to repay.
One more thing; you’re seeing “average” revenue figures. Some franchisees are killing it while others, aren’t.
So, when someone tells me that they’ve read that franchisees of the concept they’re interested in make $240,000 a year on average, they’re not. Some of them are bringing in average revenues of $240,000 a year. Not average profits.
Now that you know the difference, let’s get back to you wanting to make more money.
Of course you want to make more money. Most people do.
Miserable Money
If you had the opportunity to make a lot of money in a particular franchise, but you’d have to work 14 hours a day-7 days a week, would you do it?
I know what you’re going to say.
“Joel, I’m sure that I wouldn’t have to work those hours forever.”
Or…
“I’d be willing to work really long hours for a couple of years, as long as I’d be able to hire a manger to help out eventually.”
Or…
“If that’s what it would take to earn a lot of money, I’m all for it!”
Until you actually have to do it.
It’s kind of like going out and buying a car that you know you probably can’t afford, but doing it anyway.
You tell yourself that you deserve it, and that you’ll be able to afford it.
That’s until you receive your 1st of many (figure 60 months’ worth) bills for your $550 monthly payment.
The point is that reality is going to quickly set in with a franchise that you’ll be working 14 hour days in. You could end up living a miserable existence. What if you’re never home? What if (because of the franchise you chose) you end up seeing even less of your family than you did when you were in corporate America travelling all over the country for your job.
And once you’re in-you’re in. You’ve signed a legal document that says so.
And, it can be hell to get out of. Item 19
Franchisors are permitted to disclose franchisee revenues/earnings in Item #19 of their Franchise Disclosure Document. (FDD)
Almost half of all franchisors registered in the US do so now.
But, it doesn’t matter.
And remember, even if they do choose to disclose franchisee earnings, or revenues, they’re only averages. And, you’re a person-not an item on a spreadsheet. You’re not an average. You’re a living, breathing human being that just wants a fair shot at being a successful franchise owner.
Do you feel me?
And of course you never think that you’ll be on the bottom part of that average earnings/revenue scale.
Now, I know that it’s important for you to know how much you’ll make as a franchise owner.
But, there are better ways to find out how much you’ll make. You shouldn’t rely on what’s being advertised on a website or brochure. I’m not suggesting that the information shown on a franchise website or even in the FDD is fraudulent… not at all. I just want you to verify them with 10-15 franchisees that are in the system you’re looking at.
Just ask the questions that are contained in my eBook-the one focused on franchise research.
And, please don’t listen to some of the more paranoid people in the franchise industry. They’re wrong.
A Discussion On Item 19 Earnings Claims
A couple of weeks ago, I participated in a sometimes heated discussion on LinkedIn.
Are we connected yet? Let’s!
Eric Bell asked this question:
“What is the best piece of advice you would give to someone considering becoming a franchisee?”
Here are some of the answers…
Jim Coen, Franchise Channel Business Development Consultant
“One of the most compelling reasons to invest in a franchise is because franchising offers a “proven business model”, if it’s a brand new concept is without an FPR (earnings claim), how can a prospective franchisee made a valid business decision? Blue sky? Drink the Kool-Aid? “
Dan Durney, Chief E-FRAN-gelist at FranMaster
“Just because a franchisor has an Item 19 doesn’t “guarantee” success any more than the lack thereof warrants a “STAY AWAY” for fear of failure approach. The opportunity to earn a living and get a reasonable ROI – in ANY business – is “elusive” when you are LAZY or don’t follow the franchise system.”
Eric Meyer, VP, Franchise Development/Real Estate, American Driveline Systems
“Sometimes, people buy things they feel good about. They are not duped into it, they just feel right. I believe that most franchise development people want quality people in their system and are not trying to slam deals all the time. They have an obligation to the prospect to offer the most current, accurate information available at the time. With or without an Item 19 it truly does not matter. What matters is the person feels they are passionate about the concept, they can be successful, and their desire to do it. Also, the prospect needs to ask current franchisees what their experience has been. If they say great things, the person buys regardless of an item 19. If they say bad things the person most likely will not buy, regardless of the item 19.”
And, then Jim Coen and I had a little back and forth…
Jim Coen
“To say a FPR-an earnings claim doesn’t matter just doesn’t make sense to me, Joel.
Joel, you are on the buyer’s side and you are not making a broker’s fee for referring that client, correct? Then why would you stick out your neck for a franchise system that doesn’t provide a FPR when the buyer you are working for needs to earn a $100K a year. Your role is to help them find a franchise that has a reasonable chance of providing that income or ROI. If they don’t care how much money they make, they just want to fill their time, then you are right a FPR doesn’t really matter.”
Me
“Jim, respectfully-and you know I like you, I really don’t care if a franchisor provides earning information in their FDD or not. That’s because I’m focused on making sure that the people that choose to work with me (and, you’re right; I don’t receive any commissions from franchisors. I am not a broker…haven’t been for years) have the facts they need to make an intelligent decision of whether or not to buy the franchise that they’re focused on.
Earnings, shmernings. I want them to get to the heart of the matter, and they’re only going to be able to do that if they get their noses out of the FDD and start calling existing franchisees. That’s where the rubber hits the road. I want them to have human interaction. I want them to get a feel for things. The data is important.
But, if the franchisor that they’re interested in is showing (in their FDD) that average unit sales are $1.3 million in year two, but my client doesn’t want to be working 16 hour days…he didn’t think that he would have to until further investigation, well, that darn earnings claim really doesn’t matter much.
The whole picture needs to be pretty, Jim. Not just the data.”
Finally, this from Eric Meyer
“Sometimes, people buy things they feel good about. They are not duped into it, they just feel right. I believe that most franchise development people want quality people in their system and are not trying to slam deals all the time. They have an obligation to the prospect to offer the most current, accurate information available at the time. With or without an Item 19 it truly does not matter. What matters is the person feels they are passionate about the concept, they can be successful, and their desire to do it. Also, the prospect needs to ask current franchisees what their experience has been. If they say great things, the person buys regardless of an item 19. If they say bad things the person most likely will not buy, regardless of the item 19.”
As you can see, an industry debate on whether or not earnings claims are important or not-and should or shouldn’t be part of a franchisors sales/marketing process, rages on.
I vote on keeping the debate going…and front and center.
I don’t want to see earnings and revenue claims advertised. Doing so forces would-be franchise owners to only base their decisions on the numbers.
What Do You Think?
What do you think about franchisors disclosing their earnings claims as a marketing ploy on their websites and in their brochures? Should they be doing it?
Do you think that it would be possible to get sucked into an “opportunity” based on earnings claims and revenue claims alone?
What else needs to be changed in the world of franchising?
Comments are now open.
We’ve
been doing a lot of research about this lately. It’s nice to learn even more.
[email protected]
Thanks for reading the post.
JL
Great insight. My current company does not have an item 19. The last company I worked for did not have an item 19. While I am not against companies publishing an item 19, I have never found not having one to be an issue. Having a solid product (training, business support, marketing, etc.) has been the key to the success of these networks. Having good franchisee validations is important. Encouraging prospects to reach out to random franchisees listed in the FDD and ask their own questions is even better. If your network is unhappy, then your product needs work. An item 19 can’t change that.
Thanks for commenting on the post, Patrick.
You’re right: Not disclosing franchisee earnings/revenue isn’t a deal breaker.
A lousy franchise system with lousy validation is.
JL
As always, great insight from the Franchise King. While the point of this post, Joe, may be on how little weight to put into earnings claims, I think you provide some great examples on HOW to read earnings claims. Since they are not going away, and in fact will be more prevalent, educating prospective franchisees on how to read the fine print is just as noble a cause as telling them how little they should matter.
Thanks for popping by the blog, Eric.
And, thanks for coming up with a great question!
JL
If you put one foot in a bucket of boiling water and the other in a bucket of ice cubes, the average should be comfortable right? You have it right Joel, nobody makes the average. Some do really well and some do ok.
Thanks for commenting, Brian.
It’s about doing great due diligence.
Today’s franchise buyer’s should never depend on one data point to make their decision.
JL
Ok so what are the profits of the top 20 franchises in the USA?
Hi Mike,
Great question.
The last time I computed things, I came up with $2.13 million.
Franchise King®
I operate a mobile auto repair company that I want to expand. I make good money (about twice or more average mechanic makes just being an employee at a conventional repair shop). I would like to expand it using a trademark licensing agreement therefore allowing me to begin selling my business model. The concerns I foresee though are the accidental franchise. Element 1 is present and cannot go away. (trademark / logo is mandatory on every service truck)
Element 2 is present and cannot change (initial fee is thousands of dollars and monthly royalties)
Element 3 is subjective and maybe your comments could swing me one way or the other, but I just worry that maybe “franchise King” might be predisposed to negatively viewing my desire to scale my business that “might” be considered “on the fringes” of being an accidental franchise. I have read through the FTC franchise rule document regarding the element of “significant control or assistance” and have genuinely come away with the feeling that I would not be violating the rules but may be “on the fringes” of violation.
1.
There is no site to approve, no operator has a
territory. They can drive where they want.
There are therefore no requirements for a site
design.
2.
There are no designated hours of operation. They
can work as few or as many hours as they want.
3.
Housecall Auto Mechanics does not make a
product. An auto mechanic diagnoses and repairs vehicles by purchasing parts
from any place they want, and can charge what they want for parts and labor
within industry accepted guidelines.
4.
There are no required accounting procedures
other than they do not do anything illegal.
5.
I do not provide an operations manual nor insist
that a repair be done a specific way. All mechanics have their own methods.
6.
There is no training program except that any
licensee must spend one week operating with my supervision to see that they
have the necessary skills that they have stated they have.
7.
Nobody is required to participate in a
promotional campaign.
8.
Operators can receive leads for new repair jobs
anywhere.
The specifics that I have concern
about interpretation are as follows:
1.
Operators must be fair and reasonable in dealing
with clients with whom they will fix cars and if there are complaints from
clients that may tarnish the brand image the operator’s license will be
terminated. I will not tolerate any action that will tarnish the brand image.
2.
Each potential incoming licensee must sign a standard
no-compete document which would prevent them from coming in for a “learning
period” and then leaving and starting their own mobile auto repair business.
The document would not ban them from continuing to remain an auto mechanic,
just not a mobile mechanic.
3.
I do not want the term “significant control or
assistance” to be charged in the event that the licensee fixing their clients
car is offered technical support to assist them on an as-needed basis. It is
obvious that a successful outcome is desirable for each repair job made my each
licensee for their own benefit and for the benefit of the brands image. I don’t
think tech support sometimes would mean “significant control or assistance”. It
is of course “assistance” but not “significant”. Most jobs are carried out
without tech support.
4.
They must have a full size white service van as
to supply a place for logo and graphics and this van must be equipped with the
necessary equipment and tools necessary to carry out the task of mobile auto
repairs, however, the specific specifications and brands and sources of these
tools and equipment is up to each licensee.
5.
They can use a dedicated interactive dashboard
to get new leads for jobs that is operated by Housecall Auto Mechanics, but
they are not required to.
So, in summary, I believe that in
reality and without manipulation that the business details regarding Housecall
Auto Mechanics does not rise to the level of a franchise and can operate as a
“licensing agreement” or “business opportunity” without fear of legal
consequences. I believe that because my business is rather unique in its approach
to delivering services that do not require a brick and mortar building which
therefore negates so many other redundant requirements that I am already in a
better position to ask for this advisory opinion. Your advisory opinion if
found in agreement, based upon what I have stated here would give me as the
founder of this business – a comfort zone. It would also give me the ability –
without undue delay, to begin to create a much needed business that will prove
its own usefulness and carve out its niche in the auto repair services industry
for the better.
My other question is if I did expand in this way, the fact that it is a licensing agreement which by definition says that I should not be providing “significant control or assistance” – Do you think that works against me collecting a $20K initial fee (this is similar to the fee I would ask if this were a franchise system). I guess a potential incoming buyer would want to read about and hear lots of statements saying how much “assistance” I can offer them and the trademark license agreement would more prevent me from using those statements.
What thoughts / comments
thank You
Hi…Great questions. Thanks for the detail!
Here is my very short take on what you’re asking:
Disclaimer- This (my reply) is not and shouldn’t be looked upon as legal advice. I’m not an attorney.
You need to spend a little money. In other words, you need to hire an attorney who’s very familiar with franchising and licensing.
There is a fine line-sometimes, that has been crossed by people who have “Licensed” their businesses with good intentions, and who have found themselves in quite a predicament.
The predicament: They’ve become franchisors. Without even knowing it.
It could happen to you, too-in my opinion.
Link to franchise attorney list- http://www.franchisebizdirectory.com/directory/cat/franchise-attorneys/
Best of luck. Could be a good idea…I’m not sure yet. I would need to know more.