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In franchise sales, financial performance representations (FPRs) are a valuable tool for providing some comfort to a prospective franchisee that they are making an informed decision to invest in a franchise brand. But as much as we like to encourage most of our clients to make FPRs, they are not necessary to sell franchises.
For those unfamiliar, an FPR is included as Item 19 in the FTC-required Franchise Disclosure Document (FDD) any time a franchisor wants to provide historical sales or earnings information. Basically, it is designed to answer the question, “How much can I make?” For those of us who have been around for a while, this was previously called an “Earnings Claim.” The FPR does not need to be presented according to any particular accounting practices, but it must follow certain guidelines. At a minimum, the franchisor must have a reasonable basis and written substantiation for any representations made. Also, the disclosures cannot be misleading; this aspect presents unique challenges for franchisors in the Covid-19 era.
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Last summer, state franchise administrators (those who review FDDs as a consumer protection function) asked the NASAA Franchise and Business Opportunity Project Group for guidance on franchisor historical FPR considering the significant impact of the pandemic. The group was not able to give any one-size-fits-all advice, which is hardly unexpected on account of the wide range of modifications companies made, the various financial impacts the pandemic had on different businesses and the different ways franchisors present data. Certainly, whether or not to include an FPR is a complex decision a franchisor needs to make with its attorney and business advisors.
Even apart from pandemic-disclosure concerns, franchisors choose not to make performance representations for several reasons:
- Prototype operations may not be representative of what a franchisee could reasonably expect, perhaps because of the uniqueness of the location, a long tenure in a community or a broader product offering.
- Some franchisors simply do not want their financial information to be publicly available.
- Some franchisors may not have kept pristine records, so the disclosure cannot be substantiated.
Overcoming objections in the sales process
Franchisors are often concerned they cannot overcome objections in the sales process when asked why they do not have an FPR. We remind them that when they got into business for the first time, no one told them how much money they could make; instead, they did the hard work and had the management skills and self-confidence that was required to be successful. Franchisees are, by their nature, risk takers, and the best prospects are often willing to bet on themselves.
As a matter of fact, it is only in recent years that the percentage of franchisors making FPRs exceeded 50%. When I first started in franchising 30 years ago, fewer than 20% of franchisors were making Earning Claims, and this was not a barrier to successful franchise sales.
In the sales process, franchisees need to be reminded that with or without an FPR, their success will be influenced by the market, location, good management, adequate capital and the competition. Franchisors need to remind franchisees they will have the added advantage of training and other franchisor support tools. Franchisors should encourage prospective franchisees to speak with existing franchisees and to develop a credible business plan.
As a franchisor, if you have never been trained on how to sell franchises, you might avail yourself of a formal franchise-sales training program, especially if you are suddenly selling without the benefit of an FPR, which is admittedly a more challenging proposition.
Waiting on the sidelines isn’t the answer
A few years from now, when we do a retrospective, we suspect we will find that many franchisors chose not to include performance representations for 2020 and their franchise sales efforts were successful nonetheless. Hopefully, by 2022, franchisors who wanted to, but chose not to, make FPRs this year, will have reliable and consistent data to share in an acceptable format.
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We are anticipating that 2021 will be a banner year for franchise sales, which will be fueled by the number of displaced management-level workers eager to secure their own futures; the availability of capital through savings and at favorable lending rates; and the willingness of landlords to negotiate favorable deals to fill commercial vacancies. There is no need to curtail franchise sales efforts or sit on the sidelines waiting to develop the perfect FPR. In fact, doing so may cause you to miss out on one of the strongest years ever in franchise sales.