What will be my Return on Investment

Franchisors often get asked questions from people interested in a franchise such as “What will be my Return on Investment?” or “How much money can I make?” The only true response is “I don’t know!” The financial performance of any particular franchise depends on numerous factors including location and the franchisee's motivation, and business and management skills. Franchisors are typically unable or unwilling to provide any projections or earnings claims.

There is a story that I use as an analogy to explain why a franchisor is unable to provide earnings claims. It is a beautiful sunny afternoon in Vancouver. A lady approaches a cart located on the sidewalk in Robson Street and asks the gentleman manning the cart and selling jewellery to tourists and says “Excuse me. How long will it take me to walk to Stanley Park?” The vendor responds tersely “I have no idea!” The lady, a little surprised by the curt response, turns and walks along the sidewalk in the direction of Stanley Park. After she had walked about twenty paces the vendor calls to her “Hey lady. Come back here!” The lady walks back to the vendor and as she nears the cart the vendor calls out to her “About 15 minutes.” The lady is a little stunned and asks the vendor “Why didn’t you tell me when I was here before?” The vendor replied “I didn’t know how fast you walked”. I think you get the point. A franchisor is simply unable to predict the performance of any individual franchisee. Good profiling tools can give franchisors some indication of franchisee performance but there are other factors in the overall mix.

This leads us to why franchisors are unwilling to provide projections or earnings claims. This is an area where franchisors must be very careful as they open themselves up to potential litigation in the future if they provide earnings claims to prospective franchisees. Naturally, potential franchisees need to know what the franchised business might be able to generate and franchisors tend to deal with this in different ways. Once a candidate has gone through the pre-qualification process they may allow a prospect to talk to current franchisees in the system and ask what they have done. Naturally, some franchisees are reluctant to provide this type of information as it may be considered personal.

Other franchisors may give you ‘historical’ information i.e. what their corporate and/or franchised units have done in the past. This may be presented as ‘actual’ performance or as a range of earnings broken down in various categories (e.g. time in business or low, medium and top performers as a percentage of the total). This type of information will undoubtedly be accompanied by a disclaimer such as: “These projections are for illustration purposes only and in no way represent actual or potential sales volumes, expenses or profit that can be achieved by a franchisee at any location. There is no warranty or guarantee that these projections reflect actual performance which depends on numerous factors including the franchisee's business and management skills.”

Where the franchisor is required to comply with provincial franchise laws e.g. Alberta, Ontario, PEI and New Brunswick, they are required to state in their disclosure document if they provide an earnings projection for the franchise, either directly or indirectly. If an earnings projection franchise is provided, the franchisor must specify the reasonable basis for the projection, the assumptions underlying the projection and a location where information is available for inspection that substantiates the projection.

Norm Friend

Franchise 101 Inc.