In my over three decades experience as a franchise consultant, I am often asked “When you franchise your business, what are some of the most important considerations?” Here, I will examine one of those issues: when you franchise your business, the pros of giving out financial performance representations (FPR’s) or earnings claims.
First, we should revisit the definition of a FPR:
The FTC definition of a FPR: any representation — oral, written, visual or in the general media — given to a franchise sales prospect, that states, expressly or by implication, a specific level or range of actual or potential sales, income, gross profits or net profits. FPR’s include charts, tables or mathematical calculations that show possible results.
An issue that you must face when you franchise your business is whether you should offer FPR’s in the FDD. Often when you franchise your business, a potential franchisee’s first question is “If I buy your franchise, how much can I make?” Properly offering FPR’s in your FDD is the only way you can legally answer this question.
Remember, any prospective franchisee must be given a current FDD no later than your first face-to-face meeting.
If you want to disclose FPR’s in your FDD when you franchise your business, you must have a reasonable basis for such earnings claims. You must also have available written substantiation for the FPR’s for any franchisee candidate who requests it.
While the majority of franchisors do not offer FPR’s, when you franchise your business, you may consider doing so for the following reasons:
- It can be difficult to close your first franchise sale when you franchise your business unless you provide prospective franchisees some indication of the likelihood of their being successful.
- With FPR’s, it may be easier for a new franchisee to get a loan to open the franchise.
- Giving FPR’s can create more realistic franchisee expectations.
- Properly prepared disclaimers in your FDD may better protect you from liability if you offer FPR’s when you franchise your business.
- Providing financial records (Income Statements, Balance Sheets, etc.) for a particular franchisor-owned location is permitted if the unit is for sale as a franchise.
- If the person selling your franchise exaggerates the financial potential, well drafted FPR’s can limit your liability when you franchise your business.
Especially when you first franchise your business, FPR’s can make it easier to sell franchises. However, the significant potential liabilities associated with FPR’s are addressed in my previous blog. The majority of franchisors do not give FPR’s because of the potential liability they face if the franchisee does not achieve the numbers disclosed in the earnings claim.
In my next blog, I will address special circumstances in FPR’s.
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