Fortune Telling Can you know what you'll earn before opening a franchise?

Knowing the profit potential for your business is an essentialpart of planning. We asked franchise attorney Andrew A. Caffey forthe lowdown on calculating what kind of money you'll make withyour franchise concept.

BIZ Experiences: Is it legal for a franchise company to discloseearnings?

Andrew A. Caffey: It's legal, though not mandatory.Some franchisors provide this information and others choose notto.

What's the best way to find out how much money apotential franchisee will make?

The first and best source of information is the UFOC, ifyou're lucky enough to be dealing with any of the 20 to 25percent of franchisors that [disclose earnings]. The second sourceis the franchisees in the system themselves. Even if a companydoesn't provide performance information, it'll provide alist of franchisees. Contact a healthy sample of those franchiseesand ask them how their businesses are doing-what theirexperience has been, how strong the training was, what theperformance is like. Franchisees, if approached properly, aregenerally comfortable sharing that information.

The third reliable source is your own CPA, who's probably inthe best position to review the prospective performance of abusiness. He or she can give you a pretty good idea of when thebreak-even points will be met and what sort of gross and netrevenue a franchisee might expect.

What are the red flags to look for when you hear afranchisor's earnings claim?

If a franchisor delivers an oral [earnings] statement, as aninformed prospective franchisee, I would expect to find that figureat item 19 of the UFOC, and I would review it and look at thelimitations and the material assumptions that underlie it. If Ireceive an oral earnings claim and I don't find [the samefigure] in the UFOC, that's a huge red flag.

What kind of salary can a new franchisee realistically expectto draw from a franchise?

That's an excellent question [to ask] existing franchiseesand also to review with your CPA.