In FDD Item 19 Financial Performance Representations, we discuss in detail what a financial performance representation is and what franchisors need to know about making a financial performance representation and the consequence of not including one in their Item 19. In this article we outline the mandatory disclaimers that you must include in your Item 19 about financial performance representations and the disclaimer that must be included if you elect to omit a financial performance representation in your FDD.
Irrespective of a franchisor’s decision to include or exclude a financial performance representation, FDD Item 19 must be structured to include a specific disclaimer about the FTC Federal Franchise Rule, what a financial performance representation is and what the franchisor’s obligations are regarding disclosure of financial performance representations. Under the federal rule, the following disclaimer must be included in Item 19:
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.
Franchisor’s are not required to include financial performance representations in their Item 19. If a franchisor elects to not include a representation then under the federal franchise rule, franchisors must include the following disclaimer:
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 Item 19. The disclaimers are also instructive on the issue of financial performance representations. As a franchisor addressing issues regarding financial performance representations and what your sales team may or may not disclose to prospective franchisees is critical. Ultimately best practices dictate that you eventually include a financial performance representation so that at the management level you ensure that you control the information provided to prospective franchisees and that you mitigate future litigation risk associated with unauthorized financial performance representations. To learn more about financial performance representations, click here.
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