Financial Performance Representations

In over 30 years of franchise consultant experience, people frequently ask me, “Can I give out financial projections to prospective franchisees?”

The answer is yes, if the earnings claims are compiled correctly and included in Item 19 of the company’s FDD (Franchise Disclosure Document).

The FTC (Federal Trade Commission) is the federal agency that oversees franchising.

The FTC permits a franchisor to provide information about the actual or potential financial performance of its franchises and/or franchisor-owned outlets, if there is a reasonable basis for the information and if the information is included in the FDD.

The FTC’s definition of an earnings claim is broad. Earnings claims include any representation — written, oral or visual to a prospective franchisee, including information in the media — which states, expressly or by implication, a specific level or range of actual or potential sales, income, gross profits or net profits.

Earnings claims also include tables, charts or mathematical calculations that show possible results based on a combination of variables.

The definition of an earnings claim further states 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.

The franchisor may also supplement the information provided in Item 19, for example, by providing information about possible performance at a particular location or under particular circumstances.

The earnings claim must have a “reasonable basis” at the time the information is shared. Also, the franchisor must have written substantiation and make it available to prospects, upon request.

Some examples of earnings claims are:

  • Entrepreneur Magazine reports that gross sales for an average franchise unit are over $20,000 per week;
  • Most of our franchisees take home $2,500 a week;
  • During the first year of operations, the franchise will achieve a 100% ROI (return on investment);
  • You can anticipate annual sales of $750,000 a year with a profit margin of 30%.
  • A franchise typically breaks even in 18 months; and
  • In the first six months, you can earn enough money to buy a Porsche.

As you can see, if you give any financial information to a potential franchisee about sales or profits you have made an earnings claim. While many franchisors do give out earnings claims, due to the potential risks involved, the majority do not.

In future blogs, we will address the Pros and Cons of offering earnings claims as well as the legal, financial and sales implications.