In over 30 years 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?”
NFA’s August 2014 blog addressed the pros of giving out Financial Performance Representations (FPRs) in Item 19 of the company’s Franchise Disclosure Document (FDD). Here, I will discuss the reasons not to do so.
If you want more information on the legal definition of a FRP, please consult our July 2014 blog.
Before deciding whether to include FPRs in your FDD, please consider the reasons against it, including:
- Providing a franchise sales FPR greatly increases your liability. A Franchisee who does not achieve the financial projections given is likely to sue, claiming you gave out incorrect information.
- There are no precise guidelines for determining the “reasonable basis” for the franchise sales FPR. Courts and arbitrators often interpret the general standards differently;
- Any franchise sales FPR must accurately represent the company’s Franchisees. You must consider the size of the sample pool, percentage of Franchisees achieving the numbers quoted, time period covered and any applicable distinctions, for example, disparities in unit size, products and services offered, customer base, and market size and demographics;
- A particular concern of new Franchisors is the lack of an actual track record to use in creating the franchise sales FPR. Without any operating history, liability can be even higher;
- The procedures necessary for properly preparing franchise sales FPRs are often challenging and costly;
- The Franchisor is required to keep the supporting data it used in compiling the franchise sales FPR for a number of years;
- Because the Franchisee is perceived as the “little guy”, if it comes to a lawsuit, his arguments may be viewed more sympathetically;
- State regulators may consider it their role to protect their state’s citizens from dishonest franchise sales programs. FPRs may draw enhanced examination from these officials;
- Whenever a “material” event happens that impacts the numbers on which the FPRs are based, the franchise sales FPR must be revised; and
- FTC guidelines, requirements of state regulators, constraints of state and federal courts and, if applicable, the concerns of arbitration panels must all be considered when preparing franchise sales FPRs.
In next month’s blog, we will look at special circumstances pertaining to franchise sales FPRs.