Franchise Talk

Franchisors Should Consider Using FPRs (Formerly Earnings Claims)

June 6th, 2008 | Author: Jack

About 25% of U.S. franchisors currently include financial performance representations (FPR’s) in their franchise disclosure documents (“FDD”). This percentage has been relatively stable since the FTC first began permitting such representations, formerly called “earnings claims”, two decades ago.

Two trends, discussed below, may increase the percentage of franchisors who will be using financial performance representations. First, the general availability of cost-effective financial reporting software that communicates easily between franchisee and franchisor. Second, the new FTC Rule allows more information to be given to prospective franchisees outside Item 19 of the FDD.
Why should franchisors consider adding financial performance representations?

First and foremost, inquiring prospects want to know.
Most franchisor lawyers recommend that their franchisor clients at least consider adding an FPR to Item 19 of the franchise disclosure document. Franchisors are less likely to be the subject of claims by unhappy franchisees about unlawful statements if there is an existing statement in Item 19 that is complete, accurate, and complies with disclosure law. For example, an unhappy franchisee is less likely to succeed with the claim that the franchisor stated that “you will make over $100,000 a year”, if there is a disclosure in Item 19 that is inconsistent with this claim, for example that the average franchisee makes $80,000 per year in combined salary, benefits, and profits.

However, the existence of an Item 19 disclosure is no guarantee that a franchisor will not be subject to claims. For example, a recent arbitration held a franchisor liable for inaccurate information inserted in Item 19 relating to company-store profitability.

Why do most franchisors not use earnings claims?

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