Franchisor Validation

Franchise Earnings

Last week, thousands of fast food workers went on strike in New York City to protest their low hourly wages. At $7.25 a hour, fast food workers live well below the poverty level in New York and view franchisees as greedy businessmen raking in the dough. But as a franchisee, can you really pay more than minimum wage and still be able to make a profit? After all, there are a lot of added costs that go into running a fast food franchise, or any franchise for that matter, that regular business owners don’t incur. Between franchise fees, royalties, marketing pools, and little bargaining power with vendors, franchisees might be getting minimum wage themselves, rather than being the fat cats their workers imagine they are.

On a further investigation into what franchisees actually make, you’ll see it’s not clear. Item 19 in the Franchise Disclosure Documents allows franchisors to sell themselves to prospective franchisees with information. While the Federal Trade Commission requires that this information is able to be backed up with numbers, item 19 is really just a selling point for franchisors. What a store “makes” isn’t necessarily what the franchisee pockets. You need to be aware what you see in item 19 isn’t necessarily what you’ll earn as a franchisee. It’s really impossible to compare one franchise to another because there’s no standard for rating income earned by franchisees and it all depends on the sample of existing franchises the franchisor chooses to include on their FDD.

How Realistic Is the Item 19 Earnings Claim?

A sample of franchisees is where the franchisor gathers data for their figures in item 19. Franchisors pick and choose which franchisees to include in their data, and the choice they make affects the accuracy of the information. For instance, if the franchisor chooses 100 franchises at random, you’re more likely to get a clearer picture than if, say, the franchisor chose 100 franchises that were mature and had been around longer than 5 years. These mature franchises would have gotten over the first hurdles of opening the franchise and likely be getting a return on their investments. What’s more, a single shining franchise can really elevate the averages. Geographic locations included might also be very different from where you’re planning to open your franchise, and can give you misleading information.

Franchisors are not required to provide franchise earnings estimates in the FDD or at all. Not including information can mean they weren’t able to paint a pretty picture of the franchisees or that they just don’t have enough reliable information to accurately give would-be franchisees ideas on earnings. In any case, make sure that you consider all your expenses when weighing out how much you think you can earn as a franchisee. Between fees, interest on capital, partnerships, and the regular expenses of doing business, it might come out to less than you anticipated.

While there’s no telling what the fast food franchises in NYC are actually making, it’s clear that people want to know and want what they consider a fair portion of the profits for their work. As a franchisee, you’ll need to weight out employee pay with your own pay, striking a balance between paying well for valuable workers and paying yourself what you think you deserve.

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