Information a Franchisor Can Provide about Potential Sales or Profits08/14/2009
A franchisor may choose to give prospective franchisees information on the sales and/or profits of existing franchises in their official Franchise Disclosure Document (the "FDD"). This information, which is known as a financial performance representation ("FPR") or sometimes an "earnings claim," can serve as an extremely useful tool in evaluating the potential earning power of owning a franchise. The complexity of these disclosures may range from simple gross sales averages taken straight from monthly royalty reports to complicated charts and pro formas breaking down statistics by months of operation, location, etc.
However, a franchisor is not obligated to provide prospective francisees with any unit-level financial performance information at all and many franchisors choose not to distribute such information. Common reasons for not doing so are concern that the franchisor does not have enough historical information to provide an adequate basis for a claim; that providing any information could expose it to complaints that the data was misleading; that it does not need to provide the information to sell franchises, or because the data will not show favorable performance.
If a franchisor provides an FPR, it must comply with specific standards stated in the Federal Trade Commission Franchise Sales Rule. Once the disclosure is included in the FDD, a franchisor can include excerpts of it in franchise sales literature, provided the excerpts are not misleading, and also may provide supplemental information to a prospective franchisee after he or she has received the FDD. The restrictions on providing an “earning claim” outside of the FDD does not apply to providing historical financial data for a particular store or unit that a franchisor owns and is offering for sale.
If a franchisor does not provide financial performance information in its FDD, but its salesperson or other representative discusses the sales or profits of franchisees with you (as a prospective franchisor), be sure to document exactly what was said, by whom, in what capacity, the time/date/circumstances and any other witnesses. If providing through an online presentation, save screenshots should the numbers they provide orally end up being inaccurate, and you feel you were mislead, the oral statements may provide a basis for recovery of some of your losses.