United States: Are Your Financial Performance Representations Up To Snuff?

During February's International Franchise Association's Annual Convention in Las Vegas (see www.franchise.org for more information on the IFA's events), Max Schott of Gray Plant Mooty and I were asked to co-facilitate two round tables on Financial Performance Representations (FPRs for short), which may be contained in Item 19 of the Franchise Disclosure Document prepared by a franchisor. Both roundtables produced varied and interesting discussions about various aspects of FPR disclosure. Over a series of blogs in the upcoming weeks, with Max's permission, I am going to share some of the observations which our roundtables produced. I thank Max Schott for co-authoring this summary with me.

FPRs on the Rise. Recent statistics show that about 67% of franchisors now include financial performance representations in Item 19 of their franchise disclosure documents ("FDDs"). This is up from only 25% five years ago. Given the rise of FPRs, franchisors may find themselves at a competitive disadvantage if they do not prepare and include an FPR in their FDD. In addition, the lack of some form of FPR in Item 19 may increase the risk of a franchisor's franchise sellers making unlawful FPRs since the first, second and third thing prospects want to know is how much money they can potentially make.

Can existing franchisees provide financial information to prospective franchisees that is not in the FDD? A franchisor and its franchise sellers may only make an FPR to a prospective franchisee if it is disclosed in Item 19 of the franchisor's FDD. If the prospect finds the same information on its own or receives it from another source, like existing franchisees, the information does not need to be included in the FDD. As an illustration, if an existing franchisee is videotaped discussing its breakeven point and this information is not in Item 19 of the franchisor's FDD, can the franchisor email the video of this discussion to a prospective franchisee or otherwise direct a prospective franchisee to it? The answer is "no." While it is okay for the existing franchisee (or any other existing franchisee) to provide the video or the breakeven point information to the prospect, it cannot be at the request or direction of the franchisor.

Stay tuned for our next installment!

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