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 three blogs, I tackled various aspects of this topic. NFA’s September blog addressed the cons of giving out Financial Performance Representations (FPRs) in Item 19 of the company’s Franchise Disclosure Document (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, I will review various “Special Circumstances” that may apply to a particular franchise opportunity.
These special circumstances include:
- If the franchise’s industry has several entrenched, thriving rivals that include FPRs in their FDDs;
- If the Franchisor’s location(s) has a strong, devoted following in its original market that may not be duplicated in other areas;
- For a newly launched franchise opportunity, if no franchised locations exist for a prospective Franchisee to contact to discuss financial operating history;
- If the company-owned locations for a new franchise opportunity have a long operating history, which may not be relevant to a new franchise unit;
- If the locations for a new franchise opportunity will be clustered geographically;
- If the franchise opportunity has diverse locations, making it hard to compare sales, such as units in stand-alone buildings, malls, shopping centers, pop-up stores, kiosks and seasonal locations;
- If new franchise units will be offering additional or different products or services from existing locations;
- If the franchise opportunity is not yet familiar to its potential customers; or
- If the franchise opportunity is confronted by regional concerns – e.g. the locations in one part of the country are more profitable than those in other areas.
If one or more of these conditions exist, you may wish to include FPRs in your FDD for your franchise opportunity. A Franchisor must evaluate the wisdom of providing FPRs to help stimulate franchise sales against the possible liability if a Franchisee fails to reach the sales, profits or other figures listed in the FPR.