12/18/2014 04:52 pm ET Updated Feb 16, 2015

Should Franchisors Include Earnings Claims?

Earnings claims are an optional piece in the Franchise Disclosure Document, and up until recently, most companies opted out of providing them.

On one hand, this developed challenges for prospective franchisees to accurately determine their income levels. If asked what franchisees could expect to make on their money, all the parent company could respond with was, "I can't tell you." Not the best sales pitch to someone looking to invest over $100,000 into your business model.

Prospective buyers then went to evaluate current franchisees, asking about the business and past incomes. This puts current franchisees in the driver seat, with the ability to say anything about their earnings or the franchise. It also may not provide an accurate representation of the franchise as a whole, but rather only showcase the pool of franchisees surveyed.

On the other hand, franchisors weren't in jeopardy of being sued for misleading earnings claims.

But with more and more companies including them, the old steadfast to opt-out has slowly been receding.

When to Include Earnings Claims

Earnings claims can be an incredible marketing tool to highlight the success of your franchisees, validating your business model. And parent companies are realizing the benefit of providing accurate earnings claims as a competitive advantage. This tells prospective buyers, "We're proud of the revenue generated by our franchisees, and we're willing to show the numbers."

If you have a well-established franchise or have a strong corporate store history to position earnings claims to better tell your story, then I recommend that you include them. But the key is to follow these three guidelines:

1.) Be Accurate

Earnings claims are designed to give prospective franchisees an accurate representation of their potential income levels over various stages of the business. If the only numbers you present are from well-established franchises, ignoring completely the franchises in their first few years, you will find yourself in trouble. New franchisees rarely, if ever, make as much when they open their doors as after ten years. Your numbers should reflect that.

Instead of developing broad generalizations, break out the numbers into categories based off of years in operation. Franchises in the first 1-3 years of operation average revenues of $100,000-$500,000. Franchises open for 3-5 years average revenues of $500,000-$750,000. And so on.

2.) Be Honest

This should go without saying, but sadly in today's world it must be specifically stated. Do not alter, exaggerate or falsify your claims. This also extends to creating your presentations. You can't base your numbers off just the top 10%, completely ignoring the range of incomes your operators produce. To ensure authenticity, and avoid developing legal issues down the line, develop your averages and ranges based on all of your operators.

3.) Don't Be Misleading

One of the easiest places to develop trouble further down the road is to be misleading or develop ambiguity. Keep your facts straight, and put outliers in context.

This applies to a lot of the gray areas, especially for franchises just starting out. For example, say you decided to include earnings claims when launching a new franchise. With two corporate locations, you have numbers to base your claims off of. But the reality is those numbers are based off an established location with a local following, and very likely little regional or national brand recognition. Include disclaimers in your earnings claims, highlighting the differences between what a new business starting out can expect to make versus an established corporate location with ten years under its belt.

Don't set-up unrealistic expectations.

If you have a long-standing successful franchise history and develop accurate, honest and well-intentioned earnings claims, the benefits should only be positive. By ensuring that your earning claims are accurate, honest and aren't misleading, you will protect yourself from legal issues and provide a strong marketing tool in selling franchises.

If you are looking to evaluate if presenting Earning Claims leaves your franchise vulnerable, or are thinking of expanding through franchising contact your attorney today.

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