Joel Libava
If you’re coming to the (franchise) table with a good deal of past successes, it’s only natural for you to think you’ll be a profitable franchise owner.
But that’s dangerous thinking.
Let me show you why it may not to be wise to predict franchise profits too early in the game.
My Recent Conversation With An Aspiring (Hopefully) Profitable Franchise Owner
Recently, a gentleman scheduled a complimentary call with me to discuss a franchise opportunity he found. Let’s call him Fred.
A couple of minutes into our call together, Fred mentioned the franchise he was “investigating.” He also shared why he thought it would be a good fit for him. In addition, he shared his background along with some basic financial information. So far so good. Then things went off the rails a bit.
To be more specific, Fred proceeded to tell me how much money in franchise profits he planned on making with his first business unit.
“I plan on making $400,000 a year.”
“Really Fred?”*
*That was my exact response (with the appropriate sarcasm embedded in the tonal quality of my radio-friendly bassy voice.)
“How did you arrive at that figure?”
“I pulled it out of my…“
Kidding. He didn’t say that.
But how did he arrive at that figure?
He based it on a FPR.
The Financial Performance Representation (FPR)
What Is A FPR?
“The term ‘financial performance representations’ includes essentially any indication of “a specific level or range of actual or potential sales, income, gross profits, or net profits.” Item 19 may state (using the required language) that the franchisor does not provide any financial performance representation. But the FTC encourages franchisors to make FPRs in Item 19.”
One more thing.
“The FTC requires that every FPR must be truthful and reasonable, backed by substantiating written information the franchisor possesses when the representations are made.”
The FPR definition above comes courtesy of Lexology.
My Opinion Of FPR’s
I can’t stand FPR’s. Why?
Because some franchise buyers do what Fred did.
In a nutshell, Fred arrived at his figure of $400,000 a year* in franchise profits by looking at the “income” of the top 25% of franchisees in the system he was investigating based on what he saw in the FPR .
*You would definitely be considered a profitable franchise owner with annual income like that!
And when I asked him if the franchise business profit was before paying Royalties etc., Fred quickly said it was. But was it?
Was it gross income or net income? Was it income at all?
I have no idea. I didn’t look at the Franchise Disclosure Document (FDD). Remember, this was a complimentary call-not a comprehensive Franchise Ownership Consultation.
When It Comes To Franchise Profits, FPR’s Are A Bit Confusing
I’ve never read a Financial Performance Representation that states the following:
“Our 145 franchisees earned for themselves, after Royalties and expenses, on-average, $52,757 in their second full year in business, and $73,872 in year 3.”
Now wouldn’t it be great if all franchisors provided a FPR that read like that? It’s something I’d like to see. And I’d be willing to wager Senator Cortez Masto would quickly get behind that type of transparency from franchisors.
With that in mind, here’s what Senator Cortez Masto says about franchise ownership, and a couple of things that need to be changed to lower the risk for aspiring franchisees:
Bluntly, providing real, easy-to-read earnings claims like the one I wrote above would go a long way in helping today’s prospective franchise business owners make better, more informed* decisions.
*As opposed to figuring out the gobbledygook that passes for FPR’s. Words and numbers that don’t tell the entire story of how much franchisees earn. How much franchise business profit can be had.
If You Want To Be A Profitable Franchisee, Focus On The Facts
Call me crazy, but I feel you need to go into owning a franchise with your eyes wide-open. Why is that?
Because it’s too easy to get sucked in in by franchise industry hype.
For example, some franchisors are still using this word to describe their franchise opportunities. You need to ignore stuff like that.
Another thing you need to ignore are the debunked franchise success statistics still being used in franchise marketing. It’s not factual information.
With that in mind, how can you get the facts you need to make an informed, hype-free decision on a franchise to own?
By reading articles like the one you’re reading now.
And by learning how to do franchise research the way it needs to be done.
Because if you do the needed homework before you choose a franchise to buy, and you have the funds you need upfront-and while your new business ramps up, your chances for success increase immensely.
