In my over 30 years of franchise consulting experience, I am often asked if Franchisors can give financial projections, otherwise known as FPRs, that potential franchisees will use to help them determine if they should purchase a particular franchise opportunity.
In my last blog, we discussed the rules and regulations regarding the preparation of Financial Performance Representations (FPR).
FPRs, a quick recap:
The Federal Trade Commission oversees franchising and 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 FPR is properly included in the Franchise Disclosure Document (FDD).
An FPR can be any presentation to a franchise sales prospect – visual, written or spoken – which says or implies a particular level or range of potential income, profits or sales to be derived from the operation of the franchise. This definition can apply to information in the general media. Any FPR must have written verification, which must be furnished to a franchise sales prospect upon request.
Often, the area in which a franchise sales prospect is most interested is how much money can be made operating the business. All new Franchisors must determine if they will put a FPR in their FDDs. The FDD must be furnished to each franchise sales prospect by the first in-person meeting.
Due to the liability inherent in offering FPRs, most Franchisors decide against including a FPR in their FDDs. As with any business decision, there are pros and cons involved.
FPR pros include:
- Providing FPRs can make it easier to close the first few franchise sales.
- Without a FPR, franchise sales prospects must contact existing franchisees for information on how the franchise performs financially. A random sampling by franchise sales prospects can result in inaccurate information.
- FPRs can result in more informed franchise sales prospects.
- Projections may make it easier for the franchisee to secure financing for the new business.
- A properly prepared FPR can reduce the probability of a franchise sales person promising the prospective franchisee an unrealistic return on investment or income.
- Properly prepared FPRs may offer the Franchisor some protection from liability should litigation arise.
Remember, if a particular Franchisor-owned unit is available for sale, the actual financial performance of the specific location can be shared with the franchise sales prospect.
In our next blog, we will address the cons of offering FPRs.