Does a franchise have to provide financial information to prospective buyers?
If you’re exploring franchise ownership and you’ve received a franchise disclosure document (“FDD”) from a franchisor, one of the key places you need to look is Item 19. The Federal Trade Commission Franchise Rule requires all franchisors to follow a specific format in their FDDs, and all of the same information must be found in all of the same “Items.” Item 19 is where franchisors have the opportunity to make financial performance representations. Obviously, you want to know if this franchise is profitable.
What many people don’t know is that franchisors don’t have to make financial performance representations. Franchisors can simply sell their franchise without saying whether franchisees can make any money. Obviously, most franchisors want to actually sell their franchise, so they usually provide financial information here. However, they are not required to.
If the franchisor does not make any financial performance representations, their Item 19 must say:
“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 [franchisor’s representative], the Federal Trade Commission, and the appropriate state regulatory agencies.”
This language is actually required by the FTC Franchise Rule. If you see this, it’s not the worst thing in the world. There are a few reasons why a franchisor may not make any financial performance representations. The franchise could be an entirely new concept that has no financial history. Does that make it more risky? You bet. However, you could be getting into a huge brand at the ground level. That’s something you’ll have to weigh.
Either way, do yourself a favor and have a franchise lawyer review your franchise disclosure document and franchise agreement before you sign anything.