If you find a franchise that interests you and you want to learn more about that brand, you first need to confirm if the franchisor publishes an Item 19. This item is referred to in the Franchise Disclosure Document (FDD) as the Financial Performance Representation (FPR.) The FPR is important because it shows the financial history of earnings and profits for the franchisees in the system.
The reason why this information is very important is because it is easier to complete the due diligence by completing a more accurate Proforma with this data. The problem lies in that most Franchisors are reluctant to proclaim this data, as they are not required to disclose any FPR’s by the FTC.
Per FranData’s research in 2009, on the International Franchise Association’s website, www.franchise.org, more franchisors are reporting an Item 19 every year. The findings suggest the following information regarding Financial Performance Representations:
*Thirty-five, (35%), of all franchisors reported a Financial Performance Representation, sometimes commonly referred to as an, “Earnings Claim.”
*The use of Financial Performance Representations is not related to major industry groups. Food brands and non-food brands were equally likely to make FPR’s.
*Of the brands that report a Financial Performance Representation, 30% also included expense information contained in the FDD.
*One factor that contributed to the likelihood that a franchisor will make a Financial Performance Representation is the number of years of experienced operating units. Brands that have been operating for more than 5 years are more that 13% more likely to make a FPR.
If you’re not sure if the brand you’re reviewing has an Item 19? Contact an expert FranFinders franchise consultant and we can help you by over viewing the Franchise Disclosure Document. Remember: The more financial information you can gather prior to your investment decision, the more likely you are to make a prudent purchase.
