In my over 30 years of franchise consulting experience, I am often asked if a Franchisor can give financial projections or earnings claims that potential franchisees will use to help them determine if they should purchase a particular franchise opportunity.

In my last blog, we discussed the reasons why a Franchisor should consider preparing Financial Performance Representations (FPRs) in Item 19 of the Franchise Disclosure Document (FDD) for their franchise sales program.

For more information on the legal definition of a franchise sales FPR, please see our July, 2014 blog.

There are many reasons why a Franchisor should NOT prepare and disseminate a franchise sales FPR.

The following are some of these reasons:

  1. The potential liability to the Franchisor is enormous. If a new Franchisee does not meet the franchise sales FPRs, then there is a strong likelihood that the Franchisor may get involved in litigation with the Franchisee;
  2. Preparing the franchise sales FPRs is often difficult and time-consuming;
  3. The standards for determining a “reasonable basis” for the franchise sales FPRs are vague at best. What is “reasonable” is certainly open to interpretation by courts and arbitrators deciding this issue;
  4. If the franchise sales FPRs are litigated, the sympathy will normally be with the Franchisee, not the Franchisor;
  5. The franchise sales FPRs must be representative of the Franchisees in the Franchisor’s system, including the group measured, the time period measured, the number of franchise locations measured, the number and percentage of locations that are reaching the FPRs and certain distinguishing characteristics of the locations (for example, square footage, drive-through, urban vs. rural locations, corner locations).
  6. The franchise sales FPRs must meet the FTC Guidelines for preparing FPRs along with the requirements of state regulators, arbitration panels (if applicable) and federal and state courts;
  7. Start-up Franchisors don’t have historical data on which to base the franchise sales FPRs. They can create forecasts of Franchise Income and Expenses, but these are even risker for the Franchisor;
  8. FPRs draw increased scrutiny by state regulators who often view their job as protecting their citizens from unscrupulous Franchisors;
  9. The Franchisor must keep the verification data for the franchise sales FPRs for many years; and
  10. The Franchisor must update the franchise sales FPRs when a “material” event occurs that requires revising the financial data supporting the franchise sales FPRs.

We will share some further thoughts on franchise sales FPRs in next month’s blog.