Many franchisors in North
America are reluctant to provide earning claims in their disclosure
documents. In the United States projections have been in the past
such a cause for franchisees to take legal action (when they did
not achieve projections) that the majority of franchisors today
simply do not provide projections or any form of an earnings claim.
If they are provided, US franchise laws require that such earning
statements be fully explained and substantiated in Uniform
Franchise Offering Circular. In Canada there are disclosure laws in
Ontario and Alberta that have similar earning claim requirements.
The balance of Canada is buyer beware. If the projections are
provided, how do you know that they are accurate and applicable to
the market and location you are specifically looking at? How can
you make a fully informed business decision and protect
In order to make a fully informed decision, it is important that
you do your research. If the franchisor does provide numbers to
you, do not rely fully on the statements and projections that are
provided. Projections are simply estimates of what the business
might make. They are often based on the franchisor’s experience.
But inevitably they are accompanied with long statements such as,
“The actual gross sales achieved by any given franchisee will
differ from the gross sales scenarios shown on the Proforma
Financial Statements. The Franchisor makes no representations that
any given franchisee will or should expect to achieve any of the
gross sales scenarios shown on the Proforma Financial Statements. “
These projections are designed to entice interest but may not
necessarily reflect what will actually happen. The projections
provided may reflect averages or may instead reflect the best
operating store. It may reflect a corporate store and not a
franchise. When receiving projections always ask where the numbers
come from and what substantiates these numbers. What do the numbers
really represent? Seek clarity and get the clarity in writing.
There are a lot of variables in operating a business. Competition,
economy, labor market, traffic patterns and possibly the biggest
influencing factor is the operator himself. Through his
implementation of the business operating system and his commitment
to the business one can dramatically influence of the profitability
of the business. There are numerous examples of where someone has
taken over an existing location and with the product and same
location they have dramatically changed the profitability of the
How does one protect oneself? The key is to validate the numbers.
Talk to an accountant. Business consultants can also assist. The
best source of validation is from the existing franchisees
themselves. Call as many franchisees as you can. Ask them questions
Has the business lived up
to your financial expectations?
Were the projections that
you were provided by the Franchisor realistic?
What are your profits as a
percentage of sales?
What are the average sales
the information you compile to prepare three cash flow projections
- a best case scenario, worst case scenario and most likely case.
Plan for the best but be prepared for the worse case.
Some other financial resources are available to you. Performance
Plus is an on-line performance benchmarking tool provided by the
government of Canada. It provides detailed financial and employment
data on more than 600 business sectors across Canada. It can
provide you with average incomes of similar businesses across
Canada. You can access this information at
resource available is the book How Much Can I Make? by Robert Bond,
Source Books Publications. The numbers are based on US locations
but can provide some insight. This book provides recent actual
sales, costs and/or profit data or guidelines on over 140
broad-based franchise systems. The list runs from the McDonald's
and Taco Bell's of the world to newer, smaller franchises with only
a few operating units. Major industry categories are covered.
Being in business for yourself is a lot of hard work. Start the
hard work before you open your business by doing your due diligence
to make sure that you are making a fully informed decision. Look at
all the expenses carefully and validate each one where
By going in fully informed, you will sleep better at night, rather
than tossing and turning wondering if you have made the right
decision. You will have the comfort of knowing that your efforts
will directly effect your success and that your financial
expectations are realistic and attainable.
Wayne Maillet is the principal of Franchise Specialists, and a
full-time franchise consultant. He has over 20 years of experience
in franchising and works with several franchisors in growing and
developing their brands. Mr. Maillet lives in Vancouver and can be
reached at 604.941.4361 His e-mail address is
email@example.com Franchise Specialists web site can be
found at www.franchisespecialists.com