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 three blogs, I have discussed several issues relating to this subject.
First, we reviewed the rules and regulations regarding the preparation of Financial Performance Representations (FPRs) in Item 19 of the Franchisor’s Franchise Disclosure Document (FDD).
For more details on this topic, please read NFA’s July, 2014 blog entitled “Financial Performance Representations” dated July, 2014.
In our August blog, we discussed the reasons a Franchisor should prepare and disseminate FPRs for their franchise opportunity.
Third, in the September blog, we addressed the cons of giving out FPRs to franchise prospects interested in possibly purchasing the franchise opportunity.
Please keep in mind that if a Franchisor chooses to prepare a FPR for its franchise opportunity, the figures must have a “reasonable basis”.
The purpose of this blog is to address “Special Circumstances” in a franchise opportunity that may influence a Franchisor to prepare and disseminate FPRs.
These special circumstances typically apply to a franchise opportunity where one or more of the following conditions pertain:
- The franchise opportunity is new and not well-known to the public;
- The franchise opportunity is part of an industry segment where the competition is well-established and successful and those competitors put FPRs in their FDDs;
- Regional issues exist that make giving FPRs advisable, for example, if the franchise locations in one part of the country outperform those in another area;
- The franchise opportunity has a “cult-like” following in its market;
- The particular franchise opportunity has different types of units, such as inline shopping centers, freestanding buildings, seasonal and kiosks, making comparisons difficult;
- The franchise opportunity has company-owned locations with many years of experience;
- The Franchisor plans on concentrating sales of its franchise opportunity in a particular market area;
- The franchise opportunity will be introducing new products or services; or
- The franchise opportunity has only company-owned locations (or locations owned by affiliate companies). Therefore, there are no franchise locations with which the prospective Franchisee can talk.
In summary, a Franchisor must weigh any applicable “special circumstances” outlined in this blog verses the potential liability of preparing FPRs that fail to meet the legal standards created by the Federal Trade Commission, federal and state courts, and state regulators.