In my over 30 years of franchise consulting experience, I am often asked if a franchisor can or cannot give financial projections or earnings claims that potential franchisees will use to help them determine if they should purchase a particular franchise opportunity.
The rendering of these financial representations (known as “Financial Performance Representations or FPR” by the franchise rules and regulations) often have a major impact on the potential franchisee’s decision.
Can a franchisor give out FPRs, or are they prohibited from providing such information to a potential franchisee?
The answer is yes, a franchisor can disseminate such data–but such figures must be prepared in a very specific manner and be included in Item 19 of the franchisor’s Franchise Disclosure Document (FDD).
Financial Performance Representations Definition
What is the FTC’s definition of a FPR? The FTC’s Franchise Rule 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 definition of Financial Performance Representations goes on and states the financial performance information that differs from that included in Item 19 may be given only if a franchisor provides the actual records of an existing outlet that the franchisor is considering selling, or a franchisor supplements the information provided in Item 19, for example, by providing information about possible performance at a particular location or under particular circumstances.
An FPR includes any representation, including oral, written or visual representations to a prospective franchisee, including a representation in the general media, which states, expressly or by implication a specific level or range of actual or potential sales, income, gross profits or net profits. An FPR includes a chart, table or mathematical calculation that shows possible results based on a combination of variables.
The FPR must have a “reasonable basis” at the time the franchisor disseminates the FPR, and the franchisor must have written substantiation and make it available to prospects, if they ask. All of this information must be included in Item 19 of the FDD.
Some examples of Financial Performance Representations include the following: the Wall Street Journal reports that the average franchise units do more than $10,000 per week in gross revenues; a franchisee will break even in 18 months; a franchisee will see a 100% return on investment within the first year of operation; a franchisee will earn enough money to buy a Lamborghini or Porsche; most franchisees are clearing a $1,000 a week; and the franchisee can expect annual sales of $500,000 a year in gross revenues with a profit margin of 33%.
As you can see, any financial information given to a potential franchisee about gross or net sales or profits is a FPR. While FPRs are often given out by franchisors to potential franchisees, it is not surprising that most franchisors do not give out FPRs.
In subsequent blogs, we will discuss the Pros and Cons of preparing Financial Performance Representations and the legal, financial and sales aspects of such actions.