When you buy a franchise, you may be able to sell goods and services that have instant name recognition and you may receive training and support that can help you succeed. But purchasing a franchise is like any other investment: there’s no guarantee of success.
The Federal Trade Commission (FTC), the nation’s consumer protection agency, has prepared this information to help you decide if a franchise is right for you. It suggests ways to shop for a franchise opportunity and highlights key questions you need to ask before you invest.
You may want to know how much money you can make if you invest in a particular franchise. A franchisor isn’t required to disclose information about potential income or sales. If it does, the law requires it to have a reasonable basis for the claim when it’s made and to include the claim in Item 19 of the Franchise Disclosure Document (FDD). If a franchisor makes a claim that has a reasonable basis, the FDD also must disclose:
• the source and limitations of data that support the claim
• any important assumptions on which the claim is based
Be sure to ask the franchisor for written substantiation that supports the claim. The franchisor is required to provide substantiation if you ask. An accountant can help you determine whether the claims are reasonable, and if they apply to how you plan to operate your business. When you review earnings claims, consider:
Is the Earnings Claim Typical for a Franchise in this System?
Suppose a franchisor claims that franchisees in its system earned $50,000 last year. The claim may be deceptive if it doesn’t represent the typical earnings of franchisees. The FDD should tell you how many franchises the franchisor has, how many it surveyed to get that figure, and the number and percentage of franchisees who reported earnings at the level claimed.
Average Income
If a franchisor claims that its franchisees earn an average income of $75,000 a year, that tells you very little about how individual franchises performed. Using an average figure may make a franchise system look more successful than it really is, because the high incomes of just a few very successful franchises can inflate the average for all franchisees.
Gross Sales
Some franchisors provide figures for their franchisees’ gross sales. These figures don’t really tell about the franchisees’ actual costs or profits. An outlet with high gross sales on paper might be losing money because of high overhead, rent and other expenses.
Net Profits
Franchisors often don’t have data about their franchisees’ net profits. If you get profit information, ask if it’s based on information from company-owned outlets. Company-owned outlets often have lower costs because they can buy equipment, inventory and other items in larger quantities at lower prices or may own, rather than lease, their property.
Geographic Relevance
Earnings may vary with geography. If a franchisor provides franchisee sales or income figures, ask if any of the supporting data came from franchisees in your area. The FDD should state whether there are geographic differences between the franchisees whose earnings are reported and your likely location.
Franchisees’ Backgrounds
Keep in mind that franchisees have different skill sets and educational backgrounds. The success of some franchisees doesn’t guarantee success for all.
Reliance on Earnings Claims
Franchisors may ask you to sign a statement—sometimes presented as a written interview or questionnaire—that asks whether you received any earnings or financial performance representations during the course of buying a franchise. If they told or gave you any information about how much your franchise may earn, report it fully on the questionnaire or other statement. If you don’t, you may be waiving any right to contest the earnings representations that were made to you and that you used to make your decision to buy.
In South Carolina, as in other states, buying a franchise involves both opportunities and risks. The Federal Trade Commission (FTC) provides nationwide guidance for prospective franchisees, which is also applicable in SC. The FTC emphasizes the importance of conducting thorough research and asking critical questions before investing in a franchise. Franchisors are not mandated to disclose potential income or sales figures, but if they choose to do so, the information must be included in Item 19 of the Franchise Disclosure Document (FDD). This document should have a reasonable basis for any earnings claims made. Prospective franchisees in South Carolina should request written proof of these claims and carefully evaluate the information provided, considering factors such as typical earnings within the franchise system, the influence of high performers on average income figures, the significance of gross sales, the reliability of net profit data, the effect of geographic location on earnings, and the diverse experiences of other franchisees. Additionally, the FTC cautions that franchisors may require investors to sign a statement regarding the receipt of earnings claims, and inaccurately reporting this information could lead to a waiver of rights to dispute these claims in the future. It is advisable for individuals in South Carolina considering a franchise investment to consult with an attorney experienced in franchise law to ensure they fully understand their rights and the franchisor's disclosures.
