In my over three decades experience as a franchise consultant, I am often asked “If you franchise your business, what are some of the most important considerations?” Here, I will examine some of the issues of using FPR’s (Financial Performance Representations) or earnings claims when you franchise your business.
When you franchise your business are you allowed to give out FPR’s, or are you prohibited from providing such information to a potential franchisee? The answer is yes, you as a franchisor can disseminate FPR’s when you franchise your business. However, such figures must be prepared and presented in a very specific manner. Any FPR’s you choose to utilize must be included in Item 19 of your Franchise Disclosure Document (FDD) when you franchise your business.
What are the Federal Trade Commission’s regulations for using FPR’s or earnings claims? When you franchise your business, the FTC permits a franchisor to provide information about the actual or potential financial performance of its franchised and/or franchisor-owned outlets, if there is a reasonable basis for the information, and if the information is included in the FDD.
The guidelines about using FPR’s continue — financial performance information that differs from the data included in Item 19 may be furnished only if a franchisor reveals the actual records of an existing outlet that may be for sale. In some other limited circumstances, you may supplement the information you provide in Item 19 when you franchise your business; for example, you may give figures about possible performance at a specific location or under particular circumstances.
When you franchise your business, an FPR includes any representation — oral, written, visual or in marketplace media — to a prospective franchisee, which 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 based on a combination of variables. Essentially, any financial information about how the franchise might perform is considered a FPR when you franchise your business.
Further, the FPR must have a “reasonable basis” at the time you disseminate it. You must provide written substantiation upon request.
Here are some examples of a FPR when you franchise your business:
- Entrepreneur Magazine reports that your average franchise unit has weekly gross revenues over $20,000;
- “The franchise will break even in 18 months”;
- “The franchisee can expect $800,000 in annual gross revenues with a profit margin of 33%”;
- “Most of our franchisees are netting over $2,000 per week”; and
- “Our franchisees see a 100% return on investment within the first year of operation”.
Because of the potential risks, many franchisors choose to not utilize FPR’s.
In subsequent blogs, we will discuss the positives and negatives of FPR’s and the legal, financial and sales considerations of FPR’s when you franchise your business.
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