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.
Keys to Successful Franchising: Why Franchise?
In my over three decades of experience as a franchise consultant, I am often asked “What makes one company a successful franchising entity while another fails?
Rarely is there a single reason for successful franchising versus franchising failure. Here, I will examine some of the many factors that can help a Franchisor put together a successful franchising program.
When a person buys a franchise, he or she is purchasing someone else’s “system”, trade name and learning curve. In return, the Franchisor receives money, typically both an Initial Franchise Fee and weekly or monthly royalties.
Successful franchising has been called the classic win-win situation. A successful franchising program must be structured so that both the Franchisor and the Franchisee flourish.
The benefits of successful franchising to the Franchisor are many, including:
- Potential Profit: One key to successful franchising is for the Franchisor to generate meaningful profits from their franchise operations, including the Initial Franchise Fee and on-going royalties or service fees. Other potential income streams include the sale of products, services or equipment, sales of international licensing rights, leasing real estate and/or developing financing programs. Without profits, the Franchisor cannot sustain itself.
- Fewer Managerial Problems: Successful franchising creates the most motivated managers in the world – Franchisees who have invested their money and time into their own futures.
- More Rapid Expansion: Few companies have the strength necessary to penetrate and dominate a new market quickly. Through successful franchising, a company can develop new areas using the financial and managerial resources of its Franchisees, rather than investing its own money, time, personnel and energies.
- Lower Capital Expenditures: The expense of expanding a business can be over-whelming. Through successful franchising, the Franchisor eliminates almost all of the costs normally associated with opening new locations.
- Lower On-Going Expenses: The fixed and variable expenses involved in running a franchise company are much lower than operating a similar number of company-owned facilities.
- Marketing Advantages: As the company grows through successful franchising, when local, regional and national campaigns take effect, all locations benefit, including company-owned units.
- Economies of Scale: The more locations a company has, the more buying power it commands. Using successful franchising to grow the firm also makes it easier to secure desirable sites.
For these and other reasons, thousands of U.S. companies have chosen to grow their operations through successful franchising.
Should you franchise your business? Contact our highly experienced Our franchise consultants can help! today at 706.356.5637.
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.