1. Earnings Claims.

This is what is referred to when a Franchise Company publishes financial information in an area of the Franchise Disclosure Documents, or FDD, commonly referred to as an: Item 19.

The term Earnings Claim also arises when someone, a sales person, consultant or broker, makes an “earnings claim”. This happens when someone quotes a dollar figure, whether gross or net, to a potential candidate if that information is not reported in the FDD.

The thing to be careful of with reported financials or earnings claims in a Franchise Disclosure Document is the process that the company used to calculate the numbers. I have seen many different ways of calculating an “average”.

Read the rest of this entry »

Many factors impact the initial Franchise Fee charged by a Franchiser. Some franchise companies make the mistake of setting their franchise fee based solely on what their competitors are charging. Although this may appear to be a sound strategy, the problem is that not all franchise systems are created equal, regardless of whether they operate in the same industry.

When establishing the initial Franchise Fee, it is important to remember that although the Franchise Fee can certainly help a company’s cash flow and assist in sustaining the company’s initial growth, the royalty fee income and income from the sale of products and/or services to Franchisees should be the major source of revenue in terms of the long-term profitability of the franchise operation. Companies that attempt to make a huge profit from the initial Franchise Fee may find that they are discouraging qualified candidates from looking past the huge fee.

Read the rest of this entry »