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A “Financial Performance Representation” is a statement by the franchisor regarding how much a franchisee could make if the franchisee purchased the franchise. The Federal Trade Commission Franchise Rule requires that if a franchisor is going to tell a franchisee how much the franchisee can make operating the franchise, the franchisor must disclose that in Item 19 of the Franchise Disclosure Document. Although a franchisor is not required to make a financial performance representation in Item 19, if the franchisor chooses not to make a financial performance representation, the franchisor is prohibited from making any representation about earnings of the franchisee’s potential financial performance. So this is true, especially if the franchisor has chosen not to make a disclosure in Item 19 of its FDD. One recommendation, however. You should contact other franchisees in the system and inquire of the franchisees their financial performance. If you get that information directly from a franchisee, that is no problem. And you should contact other franchisees as part of your due diligence into the franchise system to inquire what it is like to be in the franchisor’s system.
One very recent development is that the North American Securities Administrators Association (the association of state franchise regulators) recently published some commentary on Item 19 in order to make the financial performance representations made by franchisors more meaningful. In short, franchisors are not prohibited from “cherry picking” their highest performing stores as their financial performance representation. If a franchisor chooses to disclose only its highest 10% performing stores, it is also required to disclose lowest 10% performing stores. Further, generally, the franchisor must disclose franchisee only data (as opposed to franchisor or franchisor affiliate data), and if the franchisor discloses average performance (sales and some expenses across the system), the franchisor must also disclose the range and median results as well. Watch for all franchisors to begin to comply with this NASAA guidance in the 2018 calendar year.
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