The Truth About FDD Item 19: Franchise Earnings Claims

Kim Daly Coach's Corner, Vlog

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If you’re familiar with the Franchise Disclosure Document, no doubt you’ve heard of Item 19, the Earnings Claims. In this video, I’ll share with you my opinions about how to use, (and more importantly, how not to use!), An Earnings Claim in your due diligence process. Before I start talking about Earnings Claims and Item 19, let’s back up and talk a little bit about a Franchise Disclosure Document.

The FDD is a federally mandated document that, back in the 70s when the government started regulating franchising, came into existence. This is to protect you from fast talking salespeople who may try to make up Earnings Claims or hire paid singers to sing the praises of the opportunity… and they’re not even franchisees. Every year a business that operates as a franchise, they must update their Franchise Disclosure Document and then re-disclose all of the candidates who were in the process of exploring that opportunity. This gives you the most up to date information on that franchise. The Franchise Disclosure Document includes everything from a history of the company, all the executive leadership, if there’s ever been any litigation in the system. There’s a complete list of the names, addresses and phone numbers of all of the franchisees who are in the system.

Before I begin talking about Item 19, I want to stress that this is my opinion. There is more than one way to view an Earnings Claim. And I’m sure that if you had a panel of 10 Franchise Consultants, we might all have varying opinions on how to use, and how not to use, an Earnings Claim in order to make an investment decision.

When you open an FDD and you start looking at the Earnings Claim section, and let’s say that you have not yet validated meaning, you have not yet spoken to any franchisees in the system. Literally, you are looking at numbers on a page. Now, if the Earnings Claim is sensational, no doubt it’s going to raise your excitement about this financial opportunity. But because there is so much more that goes into your success in a franchise, the numbers on a page, it is my opinion that you cannot use an Earnings Claim to make an investment decision. On the flip side of that sensational Earnings Claim are Earnings Claims that are underwhelming. Many times I see candidates, otherwise very smart and qualified candidates, walk away from a perfectly amazing opportunity, because when they looked at the numbers on that in that Item 19, they weren’t excited by them, and they made the rash decision that this opportunity isn’t worth my time.

These are numbers on a page. We don’t know what owners are doing to create those numbers on a page. Isn’t it infinitely more important to you to know what owners are doing? What skillsets are required to create those numbers on a page? How many hours is an owner putting into the business to create those numbers on a page? How hard are they working? What is the closing ratio? Are they having to talk to one hundred people to sell one person to make that kind of money, or out of every two people that they talk to is one of them buying to make that kind of money?

But here’s the thing: not all business owners are created equal. So even if the two or three or five franchise owners that you talk to aren’t making the kind of money that you want to make, it still doesn’t mean that this is not the right business for you. It doesn’t mean that you can’t make the kind of money that you want to make.

One of the things I really don’t like about Earnings Claims is that oftentimes it will set up a limiting belief about what’s possible. Earnings Claims are generally based off of the average performance. Is anybody who’s starting a business setting out to be average? No! What we want to do is use the average performance to feel comfortable that for the time, investment and the skills that are required, there’s an ROI there that makes sense. But remember, wealth in a franchise is going to be created through the scale, so no one location is supposed to be the end-all-be-all.

So if you’re using Earnings Claims to make an investment decision, I hope that you will take the advice I’m offering in this video to heart. Again, it’s my opinion; you can do what you feel is best for you, but I highly encourage you, if you have questions about using an Earnings Claim or validating what are the specific questions to ask owners so that you can know you are asking the right questions regarding the potential earnings of an opportunity, I highly encourage you to leave a comment or to email me today.

I look forward to hearing from you if you have more questions on this topic. Please subscribe to The Daly Coach YouTube channel, and reach out to me directly today.

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