Determining how much you can make by owning a particular franchise can be a very difficult task. As stated in, “How Much Can I Make,” by Robert E. Bond, the harsh reality is that no one can tell (much less guarantee) you how much you might make in a specific investment. If someone does, don’t believe him or her. Even the most successful business model, whether a franchise or not, simply cannot be replicated by someone who isn’t prepared to run the business the way it should be run. Area demographics (population, disposable per capita income, education, etc.) are critical. For a retail business, having a heavily-trafficked location is critical. Adequate capital is critical. Management skill and decision-making ability are critical. Hard work is critical. The list goes on. It is up to you to ensure that all of these factors are optimized to the extent possible. If any one of these critical factors is missing or marginal, the chances are that the business will not meet your expectations.

The single most important factor in buying a franchise – or any business for that matter – is determining a realistic and supportable projection of sales, expenses and profits. Specifically, how much can you expect to earn after working 65 hours a week for 52 weeks a year? A prospective franchisee clearly does not have the experience to sit down and project what his or her sales and profits well be over the next five years. This is especially true if he or she has no applied experience in that particular business. The only source in a position to supply accurate information (subject to caveats) about a franchise opportunity is the franchisor itself.

Virtually everyone agrees that earnings claims statements from franchisors would be exceedingly helpful to a potential franchisee. Unfortunately, there are many reasons why franchisors don’t willingly make their actual results available to the public.

Franchisors are legitimately afraid of being sued for “misrepresentation.” There is considerable risk to a franchisor if a published earnings claim statement is interpreted in any way as a “guarantee” of sales or income for new units. Given today’s highly litigious society and the propensity of courts to award large settlements to the “little guy,” it’s not surprising that so few franchisors provide the information. So, if most franchisors do not provide earnings claims, then how can you determine how much you could make?

Without doubt, the most meaningful information that you can obtain on a particular franchise is from the existing base of franchisees. Bond also states that in his experience franchisees tend to be very candid about their level of satisfaction with the franchisor, but less candid about their sales, expenses and income. If you put yourself in their position, you would most likely be reluctant to share confidential information with a total stranger, notwithstanding his or her proclaimed motivations.

The better prepared you are to ask them knowledgeable, well-thought out questions, the more likely existing franchisees will respond with meaningful answers and insights. Depending on how well you have done your homework and your ability to ask questions that show a solid understanding of the basic business and its underlying economics, they should be willing to respond to your questions about: the major cost elements of the cash flow statement; the biggest surprises they encountered when they started their business; whether to buy supplies from the franchisor or from a third-party supplier; potential lenders; negotiable points in the franchise agreement; etc. In reviewing the financials, pay particular attention to the major expense items. See if there are any expense categories that you might have left out. At the early stages, even a $1,000 non-recurring expense can have a dramatic impact.

You should be very aggressive about pursuing existing franchisees as a source of insights that are not available elsewhere. If possible, visit them at their business. This not only shows your commitment, but allows you to see them in their working environment. Don’t call only the franchisees specifically recommended by the franchisor. Current franchisees are listed in the offering circular. Contact as many as you can until you feel comfortable that you are hearing a consensus. Past offering circulars list franchisees that may no longer be in the system. To the extent that you can find them, you should also talk with as many former franchisees as you can. It is up to you to separate the truth from the fiction as to why they left the system. Too many disenchanted former franchisees should be a strong warning to be exceedingly cautious in your investigation and analysis.

Highly recommended is a website www.bizstats.com. This site will give you instant access to useful financial ratios, business statistics and benchmarks, effective and understandable online analysis of businesses & industries. Just select an industry, enter the business total revenue expected and you will receive a complete average profitability and expense percentages of a business in that industry. Good luck!