A good primer article on FRP (Financial Performance Representations) was posted by attorney Gary Duvall from the law firm Dorsey & Whitney LLP. He believes that two trends may increase the percentage of franchisors who will be using financial performance representations in the FDD:
- the general availability of cost-effective financial reporting software that communicates easily between franchisee and franchisor
- the new FTC Rule allows more information to be given to prospective franchisees outside Item 19 of the FDD.
Why, in Duvall’s opinion, don’t more than 25% of franchisors provide earnings claims? He gives three reasons:
- Lack of reliable financial data
- Variability of financial results due to each unit’s local business environment
- “Sell the Sizzle”, meaning unit results are likely lower than potential franchisees’ expectations
On a side note, one representative I spoke from an Arizona-based BBQ franchisor stated that he did not believe earnings claims were good for franchisees because they discouraged the franchisee from doing research. I believe he was right in that providing an abundance of information and financial results may lessen the overall research done by a franchisee. I don’t believe that is the primary reason these executives decided not to disclosure FRP.
Back to the article…Duvall adds:
if a franchisor has reason to know that franchisee profitability is extremely low, for example, that few if any franchisees are profitable, or that most franchisees will probably close in the near future, non-disclosure of these problems as a risk factor arguably violates the duty to disclose all material facts, although this is a grey area of the law.