Profit projections are forward-looking estimates of the potential profits a franchisee might earn based on various business assumptions. In franchising, profit projections are typically provided cautiously—if at all—due to strict legal regulations under the FTC Franchise Rule. They must be supported by data and disclosed in Item 19 of the Franchise Disclosure Document (FDD) if shared.
Profit projections refer to financial forecasts that estimate the expected profit a franchisee may generate over a specific time period. These projections may consider factors such as sales volume, cost of goods sold, labor costs, rent, marketing expenses, and other operational variables. While profit projections can be a helpful planning tool, they carry significant legal risk if provided improperly in a franchise sales process.
Under the FTC Franchise Rule, franchisors are not required to provide profit projections, but if they do, the information must be disclosed in Item 19 of the Franchise Disclosure Document (FDD) as a Financial Performance Representation (FPR). These representations must be based on actual data, clearly explained, and not misleading. Franchisors that choose not to include such projections are prohibited from making earnings claims in any form. Franchisees are encouraged to build their own profit projections based on due diligence, including speaking with existing franchisees and reviewing market conditions.
Also see “Financial Performance Representation.”
Learn more about franchising in The Educated Franchise - 3rd Edition
The topic of profit projections in franchising has long been a source of tension between franchisors seeking to attract investors and regulators aiming to protect prospective franchisees. In the 1970s and 1980s, concerns about deceptive earnings claims led to tighter regulation, culminating in the FTC’s implementation of strict disclosure standards. Item 19 of the FDD was introduced to bring transparency and accountability to any earnings or profit-related information shared during the sales process.
Today, many franchisors choose to include limited performance representations in Item 19, while others avoid them altogether to reduce liability. Franchisees, in turn, have become more financially sophisticated, often building their own detailed profit projections with the help of consultants, accountants, or franchise brokers.
Profit projections can be a valuable financial planning tool for prospective franchisees, but they must be treated with caution and comply with strict legal requirements. If included, franchisors must disclose them transparently in Item 19 of the FDD and support them with actual data. Whether provided by the franchisor or created independently, understanding and validating profit projections is essential to making a sound franchise investment decision.
