Earnings Claims

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What is an Earnings Claim?
The single most important factor in buying a franchise - or any business for that matter - is determining a realistic and supportable projection of sales, expenses and profits. Specifically, how much can you expect to earn after working 65 hours a week for 52 weeks a year? A prospective franchisee does not have the experience to sit down and project what his or her sales and profits will be over the next five years. This is especially true if he or she has no applied experience in that particular business. The only source in a position to supply accurate information about a franchise opportunity is the franchisor itself.

In 1979, the Federal Trade Commission (FTC) adopted what is known as the "FTC Rule." Titled "Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunities Ventures," the rule requires all franchisors to prepare and distribute a disclosure document or Offering Circular according to a format prescribed by the FTC. The document must be delivered to any prospective franchise buyer prior to the signing of any contract.

UFOC Item 19: Earnings Claims
Earnings claims statements are covered under Item 19 of both the FTC and state Uniform Franchise Offering Circular (UFOC) requirements. In their broadest sense, earnings claims are defined as estimates or historical figures detailing the level of sales, expenses and/or income a prospective franchisee might realize as the owner of a particular franchise. However, the earnings claims statement is voluntary and unverified, and the information's format and level of detail are left completely to the company's discretion. Neither the FTC nor state regulatory agencies checks the document for accuracy or completeness.

The only requirement for any Item 19 is that the franchisor has a "reasonable basis" for the earnings claim at the time the statement is prepared. Few specifics and less guidance are provided to prospective franchisees, who are largely left to their own devices.

Still, you can learn a great deal by reviewing earnings claims. Most importantly, identifying the sales and costs that would be relevant to your own business, as well as to your skills and your experience, is invaluable. Do not be swayed by the profit margin alone, as you should also consider the cost side of the equation, such as the cost of sales, payroll costs, operating expenses, and rent and occupancy costs. Furthermore, you should also note that the historical data used as the basis for the claims do not apply to every geographic region, individual location or franchisee, whose experience and business acumen may vary.

Here are some informative examples of earnings claims statements. The files below are in PDF format. You must have Adobe Reader to read these files.

Baskin-Robbins
FASTSIGNS
Meineke

Mrs. Fields
Uno Chicago Grill
Click Here to have one of our Franchising experts to help you obtain and review Franchisor’s earning claims and/or UFOC documents. Franchising Advice & Assistance

The cost for Earning Claims and Franchisor Operating Documents range from $100 - $275. Industry group packages are also available from $100 - $850

Packages:
  • Food–Service Package -110 earning claims
  • Hotel-Lodging Package - 20 earning claims
  • Retail Package - 38 earning claims
  • Service Industry Package - 149 earning claims

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Video

Uniform Franchise Offering Circular/Earnings Claims



The Uniform Franchise Offering Circular ("UFOC")

The Uniform Franchise Offering Circular (UFOC) is a specific format of disclosure document required of franchisors (the franchise seller) to franchise buyers by certain states. It is designed to provide some degree of protection to the public by providing information about the franchising company before a franchise purchase is realized.There is no federal government agency that will receive the filing of a franchisor’s UFOC.

 The UFOC format was adopted in 1993 by the North American Securities Administrators Association (NASAA), which was later approved by the FTC.

Many states have implemented their own individual franchise rules and disclosure requirements. A minority of states, 13, have franchise filing requirements. 15 states have led franchising regulation by adopting more stringent standards of the UFOC format rather than the federal Franchise Rule.

If a franchisor is authorized to sell in the states below, the company must be registered with the following offices there.

  1. CA: Department of Corporations  (213) 576-7500
  2. HI: Consumer Affairs, Securities Compliance  (808) 586-2722
  3. IL: Attorney General's Office, Franchise Division  (217) 782-1090
  4. IN: Securities Commissioner, Securities Division  (317) 232-6681
  5. MD: Maryland Attorney General’s Office, Securities Division (410) 576-6360
  6. MN: Minnesota Dept of Commerce  (612) 296-4026
  7. NY: Attorney General’s Office (212) 416-8200
  8. ND: Office of the Securities Commissioner (701) 328-2910
  9. RI: Division of Securities (401) 222-3048
  10. SD: Division of Securities (605) 773-4823
  11. VA: Division of Securities & Retail Franchising (804) 371-9051
  12. WA: Dept of Financial Institutions, Securities Division (360) 902-8760
  13. WI: Wisconsin Securities Commission (608) 261-9555

Since franchisors who want to sell in these 14 states must use the tougher UFOC, franchisors want to minimize their disclosure efforts by issuing their prepared UFOC in 35 states.  However, a franchisor in these states is only required to provide a disclosure document compliant with the federal Franchise Rule. No record of these documents need be registered with the State.

The circular has 23 categories (*.doc) of information that needs to be provided to the franchise buyer.

  1. The Franchisor and Any Predecessors
  2. Identity and Business Experience of Persons Associated with Franchisor
  3. Litigation History
  4. Bankruptcy (i.e., any franchisees who may have filed)
  5. Listing of the Initial Franchise Fee and Other Initial Payments
  6. Other Fees and Expenses
  7. Statement of Franchisee's Initial Investment
  8. Obligations of Franchisee to Purchase or Lease from Designated Sources
  9. Obligations of Franchisee to Purchase or Lease in Accordance with Specifications or from Authorized Suppliers
  10. Financing Arrangements
  11. Obligations of the Franchisor; Other Supervision, Assistance or Services
  12. Exclusive/Designated Area of Territory
  13. Trademarks, Service Marks, Trade Names, Logotypes and Commercial Symbols
  14. Patents and Copyrights
  15. Obligations of the Franchisee to Participate in the Actual Operation of the Franchise Business
  16. Restrictions on Goods and Services Offered by Franchisee
  17. Renewal, Termination, Repurchase, Modification and Assignment of the Franchise Agreement and Related Information
  18. Arrangements with Public Figures
  19. Actual, Average, Projected or Forecasted Franchise Sales, Profits or Earnings
  20. Information Regarding Franchises of the Franchisor
  21. Financial Statements
  22. Contracts
  23. Acknowledgment of Receipt by Respective Franchisee