AAFD Franchise Tip #7: Evaluate Return on Investment

The American Association of Franchisees & Dealers (AAFD) is a non-profit organization that  acts to educate the public regarding fair franchise practices, quality franchise opportunities, and to expose the unethical practices.  The AAFD recommends that individuals considering franchise opportunities should look for 8 elements to consider in a franchise.  They believe all 8 are critical in selecting a good franchise opportunity.

TIP #5:  Evaluate ROI Numbers. 

According to the AAFD:

Only deal with franchising companies that provide sales and earnings projections which demonstrate an attractive return on your investment. Do not believe franchisors who claim they are forbidden by law to provide earning projections and evidence of actual performance. To the contrary, all state and federal laws regulating franchising encourage franchisors to provide earnings claims to prospective franchisees.

*  From “8 Things to Look for in a Franchise” by the American Association of Franchisees and Dealers.

Franchisors are prohibited from providing sales or earnings information, projections, or other representations to prospective franchisees except if within the a prescribed format and contained within the Item 19 section of the UFOC disclosure document that must be provided to serious franchise prospects.  Many franchisors do not provide this information.  I agree with the AAFD point that you should be wary of those who say that franchisors are not allowed to disclose earnings information:  They may not be allowed because the chose not to file an earnings claim.

I disagree somewhat with the assertion that you shouldn’t join any franchise chain that doesn’t provide these numbers.  There are many reputable firms that don’t offer an earnings claim, and its not because they want to hide their sales figures.  Some have been advised not to by lawyers or consultants, who seem to be divided on whether it’s a good idea.  Some believe their past performance might not be indicative of what can be projected for future locations – positively or negatively – and don’t want to provide false impressions.

The best source of sales and earnings data are the chain’s franchisees – who can disclose anything they want to.  Industry vendors are another good source. 

Robert Bond’s “How Much Can I Make?” is a good source of earnings information.  It contains 112 Earnings claim data from a variety of franchise companies.  It’s available online at IdeaFarm Books.