When franchising your business, what are some of the most important considerations? Here, I will examine one of those issues: when franchising your business, the negatives of giving out financial performance representations (FPR’s) or earnings claims.
In my previous blog, I addressed the Federal Trade Commission’s rules regarding FPR’s when franchising your business. In this blog, I will discuss the reasons not to give out earnings claims when franchising your business:
- FPR’s must have a reasonable basis when you are franchising your business. However, there are no precise rules for defining what a reasonable basis is. Courts and legal arbitrators interpret the standards differently, depending upon the specifics of the individual situation.
- There is considerable liability if you distribute FPR’s when franchising your business. You have provided your franchisees a basis on which to sue you if they do not achieve the financial levels detailed in your FPR.
- If you are considering putting together FPR’s for your FDD when franchising your business, your earnings claims must accurately represent the strength of your franchise program. You cannot simply pick your top-performing franchises and use their numbers. Consider the size of your sample pool, how many of your franchises actually achieve the figures used in your FPR, time period included, seasonal nature of your business and many other variables, such as unit size, market size, market demographics, products and services offered, size of customer base, age of operation, etc.
- It can be costly to properly prepare FPR’s when franchising your business. Plus, if a material event happens impacting the FPR’s, you must redo your figures.
- In franchise registration states, the regulators may believe they are the guardians of their state’s residents against fraudulent franchises. If you include FPR’s when franchising your business, these regulators may examine your FDD even more meticulously.
- In the legal realm, since the franchisor drafts the FDD, any ambiguous issues are usually decided in favor of the franchisee. If it comes to a lawsuit about the FPR’s, your franchisees may be given the benefit of the doubt.
- The liability of offering FRP’s can be even higher when first franchising your business, because you do not have any franchisee operating history on which to base your projections.
- If franchising your business, you must consider the guidelines and findings about FPR’s from the FTC, state courts, federal courts, state regulators and arbitration panels.
- You must keep the data on which you based your FPR’s for a minimum of several years.
In my next blog, I will examine the pros of including FPR’s in your FDD when franchising your business.
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