Why Can’t the Franchisor Tell Me What I Can Make?

Learn more about the FDD (Financial Disclosure Document) and why a franchisor can't always set expectations for sales and expenses of your franchise business.

Why can’t the franchisor tell me what I can make?

Well, they kind of can and kind of can’t.  

The Federal Trade Commission (FTC) Rules and regulations, as well as those states with separate franchise laws regulating the sale of franchises, give franchisors a choice. It can give out information regarding sales and/or expenses in a “financial performance representation” that is contained in writing in Item 19 of the Franchise Disclosure Document (FDD).  This is the only method of providing allowable financial information. The FDD is the disclosure document that all franchise companies must give to potential buyers of a franchise before any contract is signed or payment made.  

So, legally speaking, a franchisor can give you financial information if (and only if)it is provided in Item 19 of the FDD. Some franchisors may give you other information verbally, but that is not the norm and technically is a violation of the FTC Rule (and, if you buy the franchise and later argue that what you were verbally told turned out not to be true, your state law may be that verbal statements are overridden by the written franchise agreement that will most likely contain a provision stating anything told to you outside of the written agreement will be void and unenforceable).

MY SUGGESTIONS: 

1.     Carefully review any financial information, if any, in Item 19 of the FDD with an accountant or financial advisor.

2.     Be cautious with any financial information you receive  - always assume the worst case scenario when creating your own projections.

3.     While receiving gross sales information is important, it may be worthless if you cannot determine what your costs will be.

4.     Verify with existing franchisees the accuracy of the information you have received.Did they achieve the same or similar revenue as that stated? Are their expenses similar?

5.     Remember geography/demographic differences - there may be tremendous differences in revenue and costs if they are based on a major metropolitan area such as NewYork City, Chicago or Los Angeles compared to where you live and will operate.

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