Tag: financial performanc representations

Information a Franchisor Can Provide about Potential Sales or Profits

August 14th, 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. This information 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 you with any unit-level financial performance information at all. While franchise sales regulators encourage franchisors to include such information in their FDDs, many franchisors choose not to distribute such information. Common reasons for not doing so are concern that they do not have enough historical information to provide an adequate basis for a claim; that providing any information could expose them to complaints that the data was misleading; that they do not need to provide the information to sell franchises, or because the data will not show favorable performance.

If an “earnings claim” is included, it must comply with specific standards stated in the FTC 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” 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, be sure to document exactly what was said, by whom, in what capacity, and the time/date/circumstances. Should the numbers they provide to you orally end up being inaccurate, and you feel you were mislead, the oral statments may provide a basis for recovery of some of your losses.

What have your experiences with regard to earnings claims? Which franchisors are willing to provide earnings claims to prospective franchisees? Have they proved to be a useful tool in your decision to undertake (or not to undertake) a particular franchise?

David L. Cahn