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Franchisors Should Make Their Item 19 Disclosure Bullet Proof

by Ed Teixeira

As more franchisors make an Item 19 disclosure (up to 67%) commonly referred to as an earnings claim or Financial Performance Representation (“FPR”), it’s important the information pass scrutiny.

From a franchisee candidate perspective more and more franchise consultants and advisors are informing franchise candidates to avoid franchises that don’t make an Item 19 disclosure. Those franchisors that make an FPR should expect that the information will be carefully analyzed by franchise candidates that engage the services of an accountant or qualified financial advisor.

In the old days of franchising some overly aggressive franchisors staff made verbal representations regarding earnings claims thus avoiding documenting the claims. I can recall a well known franchise pioneer telling me that he got around the earnings claim issue by using the following tactic. “If someone asks me about franchisee sales I would remind them that if I told them that our location in Kansas City did $500,000 per year and our location in Birmingham did $600, 00 per year it wouldn’t be relevant to what their franchise could do in New York” Of course he had planted the seed and an expectation in the mind of the candidate regarding potential sales.

When a franchisor makes a FPR they are documenting the information in the FDD. As such the information could be challenged and serve as evidence in future litigation

Prospective franchisees should utilize an accountant or qualified financial professional to review the information presented in Item 19. There is a wide range of choices a franchisor may choose to select in terms of the information they present in Item 19. An FPR could disclose average franchisee revenues, costs, earnings or a financial statistic unique to a particular franchise. I’m reminded of the dry cleaning franchisor that discloses the average amount of laundry processed by a franchisee in Item 19 this is used by a franchisee candidate to predict potential future revenues.

Considering how important it is for a prospective franchisee to do a pro forma income statement and cash flow projection an Item 19 disclosure would be an important ingredient into constructing the aforementioned documents. In addition, the numbers can be the basis for a close examination by a qualified financial person.

More and more franchisors will be making an Item 19 disclosure. Franchisors need to be sure that the financial information they disclose can pass scrutiny. Franchisees need to utilize a qualified individual to analyze and when appropriate question the numbers.

© 2015 FranchiseKnowHow, LLC

Ed Teixeira is the President of FranchiseKnowHow.com and Chief Operating Officer, FranchiseGrade.com. He is a former franchise executive and franchisee. He can be contacted at 631-246-5782 or at  franchiseknowhow@gmail.com



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