Hey Franchise Purchasers here's a tip for you.
The Franchise Disclosure Document contains 23 items of information for your benefit and should be provided to you by all franchisors before a sale is consummated.
One important item is Item 19 (Financial Performance Representation) -- under the FTC Rule -- Item 19 "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." (See my prior post for more more background on Item 19 - Franchise Disclosure Document - Dissected - Part Four)
If a franchise company makes a Financial Performance Representation in Item 19 (this used to be called an Earnings Claim) you are entitled to know more: a franchise company must have "written substantiation for the representation at the time the representation is made." The trick is though that the substantiation will be made available only upon reasonable request." The FTC Compliance Guide notes that written substantiation means that the franchise company must have "supporting data underlying any representation..."
Now in my experience many franchise purchasers are reluctant to ask for this! You should ask for everything you are entitled to receive when making this large of a financial investment. Also, on a few occasions, when I do convince a purchaser to ask for the written substantiation, some franchise companies indicate that they DO NOT have the information. This is a violation of the FTC Rule and a major red flag. Would you buy a franchise from a company that does not comply with the law?
Franchisors: if you make an Item 19 Financial Performance Representation, be sure to inform franchise prospects that they are entitled to receive the "written substantiation for the representation at the time the representation is made" and make certain you are prepared to produce it.
Post a Comment