Franchise Law Changes Facilitate Providing Financial Information to Prospective Franchisees

The first question on the mind of most prospective franchisees is “how much money can I make?” By law, financial performance information, or “FPRs,” can only be provided to prospective franchisees in a franchisor’s Franchise Disclosure Document. Many franchise attorneys have historically advised their clients against including FPRs in their disclosure documents out of fear that franchisees will not perform as well and the franchisor will be sued over its FPR. However, the rules have changed, and today, most new franchisors are, and should be, providing this information to prospective franchisees.

The financial information you provide will typically be actual historical results based on the existing operations of your company-owned outlets, with adjustments to show any additional costs your franchisees may have – such as royalties and advertising contributions. For many years, franchise examiners in some of the franchise registration states refused to allow franchisors to provide information to prospective franchisees based on company-owned outlets. The rules changed last year to specifically allow an FPR to be based on company-owned outlets. The new rules essentially give franchisors a road map as to how to prepare an FPR from their company-owned outlets, including what they can and cannot include.

We have always advised our franchisor clients to include financial information on their existing outlets in their Franchise Disclosure Documents. How else can a prospect make an informed decision whether or not this is an appropriate investment for them? If you have even one operating outlet, you have financial information you can provide, though we have always suggested that a company have financial information from at least two outlets before including financial results in their Franchise Disclosure Document, just because one outlet could turn out to be an aberration.

As a result of the changes in the disclosure laws over the last 10 years, and especially the latest changes, most franchisors are now including FPRs in their Franchise Disclosure Document. If you are a would-be, or existing, franchise company, and you are not providing this information, you should think about doing so or you will be at a competitive disadvantage when seeking out prospective franchisees. If you have questions about how to do so, and what you are permitted to do, we can help you.