NFA Franchise Consultants
10Dec/13Off

Financial Performance Representations, Good Idea?

As a long time franchise consultant, I discussed several points in my previous blog regarding 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.

8Nov/13Off

FPR Use To Sell Franchises

FPR (Financial Performance Representations) Use In Franchise Sales

Stephen S. Raines
President, National Franchise Associates
Atlanta-based Specialists in Franchise Consulting & Franchise Development Success

In my experience over three decades as a franchise consultant, I am often asked “What makes one franchise sales program succeed while another franchise sales program doesn’t?”

Rarely is there a single reason for success or failure in franchise sales.  Here, I will examine some of the factors that can help you create a successful franchise sales program.

Franchise sales personnel must answer the first question that most potential franchisees want to know: “How much money can I make if I buy your franchise?”

The vast majority of franchisors do not give financial performance representations (FPR) 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, there are some companies that are willing to run the risks of offering FPRs during the franchise sales process in order to sell as many franchises as possible.

So what is an FPR and how does it work?

The FTC definition of an FPR covers any representation, including any oral, written or visual representation, given to a prospective franchisee during the franchise sales process, including a representation in the general media, that states, expressly or by implication a specific level or range of actual or potential sales, income, gross profits or net profits.

The FPR includes a chart, table, or mathematical calculation that shows possible results based on a combination of variables.

In franchise sales, FPRs must be fully disclosed in Item 19 of the Franchise Disclosure Document (FDD).  The purpose of the FDD is to disclose in “plain English” the details of the franchise program.

Prior to the implementation of the FDD’s predecessor (Uniform Franchise Offering Circular), prospective franchisees were given only the Franchise Agreement to review.

The Franchise Agreement is written in legalese, not plain English.  The result was that some franchisees bought a franchise without understanding what he or she was purchasing.

To be continued next month...