Alternatives To Financial Performance Representations

In my over three decades as a franchise consultant, people have frequently asked me, “As a Franchisor, should I give out earnings claims or financial projections to prospective Franchisees to help convince them my franchise opportunity is a sound investment?”

In the previous four blogs, I tackled various aspects of this topic. In my October blog, I wrote about the role “Special Circumstances” may play in a Franchisor’s decision to compile and distribute Financial Performance Representations (FPRs) in Item 19 of the company’s Franchise Disclosure Document (FDD). NFA’s September blog addressed the cons of giving out FPRs in the FDD.

In NFA’s August blog, we discussed the pros of giving out FPRs and in July, we defined FPRs and examined the rules pertaining to them. Always remember any FPR must have a “reasonable basis”.

In this blog we discuss some alternatives the Franchisor may decide to utilize rather than compiling and distributing FPRs in the FDD.

These alternatives include the following options:

  1. The Franchisor may choose to offer one or more company-owned locations for sale as franchises. In this situation, the Franchisor can show real income statements for the specific company-owned locations that are available to interested potential buyers. When selling an operational unit as a franchise, the Franchisor can charge the new Franchise Owner the business’ value as an existing business, including its equipment, furniture, supplies, customer list, goodwill, other assets and future profits. This type of franchise sale can often be quite profitable for the Franchisor.
  2. The Franchisor can elect to reveal only the expenses for a standard franchise location to prospective franchise buyers, as long as the Franchisor does not relate the expenses as a percentage of income or sales. This disclosure of costs only is not legally deemed to be an FPR.
  3. The Franchisor can show to the potential Franchise Owner industry averages, provided that the industry averages presented are not said to be the actual income and expenses of the particular franchise.