FDD Item "19" Financial Performance Representations present legal and business issues that must be carefully evaluated by Franchisors and their legal counsel. If prepared and implemented properly, Item 19 representations may serve an important role in reducing Franchisor litigation and facilitate Franchise sales.
Under the Federal Franchise Rule Financial Performance Representations are not mandatory but, if made, must be properly disclosed in FDD Item "19". The development of appropriate and compliant performance representations requires careful compliance with the mandates of the Franchise Rule, State Law and certain extremely instructive Court decisions. With regard to some (but not all) of the mandated disclosure requirements under the Federal Franchise Rule, Franchisor's must be aware of the following FDD disclaimers: Mandatory Disclaimer: About Financial Disclaimers and a Franchisor's Decision to include Representations
Irrespective of a Franchisor's decision to "include" or "exclude" performance representations in Item "19", Franchisors must include the following disclaimer: The FTC's Franchise Rule permits a franchisor to provide information about the actual or potential financial performance of its franchised and/or franchisor-owned outlets, if there is a reasonable basis for the information, and if the information is included in the disclosure document. Financial performance information that differs from that included in Item 19 may be given only if (1) a franchisor provides the actual records of an existing outlet you are considering buying; or (2) a franchisor supplements the information provided in this Item 19, for example, by providing information about possible performance at a particular location or under particular circumstances. Mandatory Disclaimer: When Representations are Not Made
If a franchisor does not provide financial performance representation in Item 19, the franchisor must state the following: We do not make any representations about a franchisee's future financial performance or the past financial performance of company-owned or franchised outlets. We also do not authorize our employees or representatives to make any such representations either orally or in writing. If you are purchasing an existing outlet, however, we may provide you with the actual records of that outlet. If you receive any other financial performance information or projections of your future income, you should report it to the franchisor's management by contacting [name, address, and telephone number], the Federal Trade Commission, and the appropriate state regulatory agencies.
The foregoing disclaimers are critical to a compliant FDD.
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