Are FPRs a Good Idea?

As a long time franchise consultant, I discussed several points in my previous blog regarding FPRs (financial performance representations). Franchise sales personnel must tackle the first question most potential franchisees ask: “How much money can I make if I buy your franchise?”

The majority of franchisors do not give financial performance representations (FPRs) during the franchise sales process because of the potential liability they may face if the franchisee does not achieve the numbers disclosed in the FPR.

However, some companies are willing to run the risks of offering FPRs during the franchise sales process in order to sell as many franchises as possible. In order to be proper, the FPRs in Item 19 of the FDD must first be true and accurate. The information contained in the FPR must be verified in order to support the representations.

In franchise sales, the franchisor can give a variety of financial performance representations, such as profit and loss statements, gross revenues only, occupancy rates for hotels or the average restaurant bill times the number of customers per day. The key is that the FPR must be accurate and have a reasonable basis for its content.

In franchise sales, for franchisors who don’t give out FPRs, the answer to “How much money can I make?” is to recommend the prospective franchisee ask the company’s existing franchisees. The franchise sales representative encourages the prospect to schedule either face to face meetings or teleconferences with several existing franchisees.

When speaking to a prospective franchisee, the current franchisee can discuss his/her experience in purchasing and launching the business, the initial training and on-going support received and income and expenses in operating the franchise. Of course, franchise sales personnel must point out that the current franchisee is not obligated to reveal his/her financial data.

Franchisors want to sell franchises. The FPR is one way to inform a prospective franchisee of the potential income and/or profits he/she can make in the franchise.

However, since most franchisors don’t give out financial performance representations (I estimate only 15 to 20% of franchisors provide FPRs), the franchise sales staff must rely on the experiences of its current franchisees to help a prospective franchisee make an informed decision to buy or not to buy the franchise. Perhaps that is the way it should be.