If you have asked a franchisor this question, you may not have gotten a straight answer (or one at all). The main reason lies in legalities. The Federal Trade Commission (FTC) has strict requirements for franchisors about how they can present earnings statements to franchisees. If a franchisor chooses to disclose earnings claims (and many franchisors choose not to), they must be provided in writing in the Franchise Disclosure Document (FDD) and all material information must be accurate and substantiated. All assumptions or qualifications of data must be clearly labeled as such in the FDD. Franchisors get nervous when answering questions about earnings because if they misrepresent themselves, even unintentionally, they could get into legal hot water.
Aside from the law, franchisors are in the business of wooing franchisees. Producing earnings projections and statements takes effort and money, time and money not spent on marketing and sales efforts. Also, the honest results may not be attractive enough to help secure franchisees. One way to get a straight answer is to ask current franchisees about earnings potential. Also review the franchisor’s financial statements and compare the income earned by franchisees along with the royalty fee. Generally, you would expect your income to be higher for franchises that require higher investments, but there is no guarantee.
The rule of thumb for a passive investment is that you should earn 10 to 15 percent ROI over time, however most franchisees are not passive participants so the opportunity to make more money could be substantial. Again, there is no locked-in earnings guarantee. Franchises typically yield earnings of at least 30 percent of their total investment annually, which you could reasonably expect to reach by your third year. The ultimate goal is to clear at least a six-figure income but it may take a few years to reach this level.
There are specific industries, such as hotels, that have a history of offering higher returns. Usually, the higher the initial investment the higher the ROI, however this is not always the case and doing your due diligence is essential before laying out any cash. If a franchisor requires a high initial investment and, after talking to several current franchisees, you discover that the earning potential is about the same as a competing franchise, you may want to go with the latter.
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