Are franchise profits guaranteed?

When considering investing in a franchise opportunity, one of the first questions prospective franchisees ask is about money. How much can you earn? Are profits guaranteed? And what should you base your expectations on? Here, leading franchise experts offer guidance to help you navigate these questions.

Can a franchisor guarantee how much I’ll earn?

The short answer is no. Shelley Nadler, legal director at Bird & Bird, explains: “Very few franchisors will be prepared to make representations or give guarantees of what financial performance [you can achieve] in a franchise business.”

Franchisors should provide factual data on what existing franchises have achieved. But, Nadler cautions, “no franchisee should rely upon any financial projections as being a guarantee that they will be achieved.” Market conditions, economic trends and individual performance all affect results.

The British Franchise Association (BFA) Code of Ethics states that franchisors must clearly outline the basis of any figures they present. For example, do they reflect actual performance or hypothetical scenarios?

What should I know about earnings claims and projections?

Franchise earnings projections are not guarantees. Instead, the idea is that they give a realistic picture of potential income based on prior performance.

The BFA’s Code of Ethics states: “Any recruitment, advertising and publicity material containing direct or indirect references to future possible results, figures or earnings to be expected by individual franchisees shall be objective and shall not be misleading.”

Franchisors can base projections on actual results from their outlets or existing franchisees, or on illustrative scenarios showing potential profits if you achieve certain turnover levels.

Nadler advises franchisors should clearly state which method they are using and what costs – such as salaries, depreciation or loan servicing – this includes.

Average performance

John Pratt, senior partner at Hamilton Pratt, explains that franchisors usually provide averages or raw data to help franchisees make their own projections.

“Franchisors need to be very careful in providing any financial information to ensure that it is based on average performance. [They should not] paint too glowing a picture of their franchise by providing performance data that relates only to the top-performing franchisees.”

Vicky Wilkes, head of legal at Aston Villa Football Club, adds that projections depend on how established the franchise is. “Where the franchise is a relatively new concept, with no or only a few franchisees, the projections are likely to be based on any pilot franchise the franchisor has undertaken… For established franchises, projections are likely to be based on information gathered from existing franchisees.

“However, the best source of information will be where the potential franchisee is thinking of taking on an outlet that is already operating the franchisor’s business. [In this instance] there should be a trading history.”

Brian Duckett, former chairman of The Franchising Centre, emphasises that transparency is critical. “Their source should be clearly stated on all projections. That source should be verifiable by the potential franchisee when doing their research.

“The franchisor should never suggest that the potential franchisee will achieve a particular level of sales. This is because, even if everyone else is achieving it, performance will depend on the effort and application of the individual concerned.”

Pratt also notes that territory or location affects earnings. “[It’s important] to understand how each franchise territory/location is established to ensure there has been fairness in any allocation.”

Can franchising make you rich?

Wealth in franchising is relative. For example, a typical middle manager earning £47,000 a year might consider £100,000 in profit from a franchise a substantial improvement.

Louise Harris, principal at Franchise Projects, also highlights non-financial benefits. “You might be doing something that you love. In this case, there is another type of enrichment to add to the money benefit.”

However, she warns prospective franchisees to scrutinise any figures carefully. “The killer question is, ‘How many of your franchisees are actually making this money?’”

Conclusion

Understanding franchise earnings involves looking beyond headline projections. Scrutinising data, asking for transparency on sources and taking independent advice from accountants or financial advisors is essential.

Nadler reminds prospective franchisees: “Even if you are provided with a great deal of detailed financial information, financial projections are not promises of performance.

“It is extremely important that you take your own proper accountancy advice in considering the financial aspects of the franchise being offered to you.”

By asking the right questions, reviewing the data carefully and considering your own abilities and financial situation, you can make informed decisions and find a franchise that aligns with both your financial and personal goals.