1851

When it comes to reading a Franchise Disclosure Document (FDD), perhaps the most important item to pay attention to is Item 19. Within the Item 19 is the potential earning claims, or Financial Performance Representation (FPR). &nbsp;

The format of an FPR and the types of earnings claims presented in the forms differ greatly from franchise to franchise.&nbsp; However, the information contained within the FPR contains specific levels of sales and profits at their locations.&nbsp; While it is not required to have an FPR, for those that do have it the law is clear on the accuracy required.

&ldquo;I find them very reliable. From the perspective of the franchisor, the law requires them to be accurate and not misleading,&rdquo; explained Adam Siegelheim, franchise attorney at <a href="http://www.stark-stark.com/?utm_source=1851franchise.com&utm_medium=article&utm_campaign=understanding-financial-performance-representations-and-their-legal-ramifications-2703154" target="_blank" rel="nofollow" target="_blank">Stark and Stark</a>.

While most franchisors elect to include an FPR in their Item 19, the section is not actually required by law.

&ldquo;It is not required to have an FPR, however, not having one may be seen as a red flag to prospective franchisees,&rdquo; said Brian Schnell, Chair of <a href="https://www.faegrebd.com/?utm_source=1851franchise.com&utm_medium=article&utm_campaign=understanding-financial-performance-representations-and-their-legal-ramifications-2703154" target="_blank" rel="nofollow" target="_blank">Faegre Baker Daniels</a> franchise practice. &ldquo;Those brands without an FPR are at a disadvantage because if others do have them, franchisees might go there instead. If you have a decent story to tell, then those numbers will help showcase the potential behind your franchise opportunity. It&rsquo;s difficult to build a strong relationship with a candidate throughout the sales process when you have to explain why you don&rsquo;t include earnings claims.&rdquo;

Aside from instilling trust in potential franchisees, an FPR can serve as protection for both parties entering into a franchise agreement.

&ldquo;In general, one of the advantages for both parties is that it lays out in writing certain data, which minimizes lawsuits in a way because it isn&rsquo;t hearsay. It serves as an incidental protective function,&rdquo; said Siegelheim.

In the event that a franchisor does not have an FPR, their sales process must be even more buttoned up.

&ldquo;Under franchise laws, if the franchisor does not include an FPR it may not provide FPR information in another medium. They can&rsquo;t say anything that relates to an actual performance representation,&rdquo; explained Richard Morey, partner at <a href="https://www.dlapiper.com/en/us/?utm_source=1851franchise.com&utm_medium=article&utm_campaign=understanding-financial-performance-representations-and-their-legal-ramifications-2703154" target="_blank" rel="nofollow" target="_blank">DLA Piper</a>.&nbsp;

To gauge risks going forward, franchisors will require potential franchisees to fill out a questionnaire detailing the process.&nbsp; Generally, one of the questions will detail performance representations.

&ldquo;A questionnaire will help you eliminate a problem early in the process if the franchisee was provided with that illegal information,&rdquo; said Morey. &ldquo;It can get to be a very difficult situation to work through. But at least you know before the franchise agreement is signed.&rdquo;

If there is a violation involving an FPR, there are several ways that a franchisor will attempt to remedy the situation.

&ldquo;Remedies can include rescission, which is basically giving the franchisee their money back and putting them back to where they were before they made the investment decision. The remedies are severe and real,&quot; Schnell said.

However, with the rise in technology in recent years, franchisees are able to do extensive research into brands and the information found in FDDs. Technology also allows them to connect with experts much easier.

&quot;Do your due diligence, because in this day and age there is information available all around you. It&#39;s right at the tip of our fingers,&quot; explained Schnell. &quot;Also make sure you are talking to the franchisor and the existing franchisees to understand what it will take to get your business off the ground, and what it will take to be sustainable. By doing your homework and working with the right advisors, you&rsquo;ll be in a good position to succeed.&rdquo;

Understanding Financial Performance Representations and Their Legal Ramifications

1851 Franchise

While not required in Item 19 of the FDD, financial performance representation carries a lot of weight when it comes to potential franchisee trust and the law.

understanding-financial-performance-representations-and-their-legal-ramifications

Sola Salons

Headshot of Sharon Gates, who has long, blonde hair and is wearing a bright blue shirt

From Corporate to Community: How Sharon Gates Built a Thriving Sola Salons Franchise

sharon-gates-sola-salons-franchise

Melting Pot

Photo of Melting Pot fondue spread with cheese and chocolate, bread, meats and fruits

Crain’s Detroit Business: Fondue Restaurant Plans Michigan Expansion

melting-pot-michigan-expansion

Pigtails & Crewcuts

Why Pigtails & Crewcuts Is a Fulfilling Investment Providing Emotional ROI

why-pigtails-crewcuts-is-a-fulfilling-investment-providing-emotional-roi

Children's Lighthouse

Naples Press: How Children’s Lighthouse Is Addressing the Childcare Shortage in Naples, Florida

naples-press-how-childrens-lighthouse-is-addressing-the-childcare-shortage-in-naples-florida

Atomic Wings

The Benefits of Joining a Franchisee-Led Franchise: How Atomic Wings Has Created a Winning Model

the-benefits-of-joining-a-franchisee-led-franchise-how-atomic-wings-has-created-a-winning-model

Buying a Franchise Masterclass

 Franchise Opportunities

Get Support Buying a Franchise

How to Buy a Franchise White Paper

How to Buy a Franchise

How to Sell Franchises

How to Grow a Franchise

Find a Franchise Supplier

1851 Franchise Opportunities

Franchisor News

Franchisor Power Rankings

FranCamp Mastermind Summit

Franchise Resources

What ALEC-Laffer's Report Means for Franchising

Website Awards

Power Rankings

About 1851

Advertise on 1851

Contact 1851 Editorial

Terms of Use

1851 Login

GROWTH CLUB LOGIN

facebook

instagram

twitter

linkedin

youtube

Design with hundred dollar bill and orange "recession" banner across the middle

ABC News: Recession Risks Are Rising, Economists Say. Here’s What to Know.

recession-risks-impact-economy-franchise-world

NRA: Restaurants Focus On Enhancing In-Store Experiences To Attract Diners in 2025

nra-restaurants-focus-on-enhancing-in-store-experiences-to-attract-diners-in-2025

The Joint Chiropractic - Dr. Anthony Tran - IFA Franchisee of the Year - 1851 Franchise

The Joint Chiropractic’s Dr. Anthony Tran Named Franchisee of the Year by the IFA

joint-chiropractic-dr-anthony-tran-ifa

TruGolf - Hybrid Golf Franchise - Nexus Golf - 1851 Franchise

TruGolf Links Unveils Revolutionary Hybrid Golf Franchise Concept

trugolf-links-unveils-revolutionary-hybrid-golf-franchise-concept

Photo of a basket of chicken wings with dipping sauce and celery

RestaurantNews: Franchisees File Comprehensive Legal Complaint Against Hurricane AMT

restaurantnews-franchisees-file-comprehensive-legal-complaint-against-hurricane-amt

Tiam Behdarvandan’s Let’s Get Moving Offers a Franchise Opportunity Rooted in Growth and Support

tiam-behdarvandans-lets-get-moving-offers-a-franchise-opportunity-rooted-in-growth-and-support

Franchise Deep Dive: Studio Pilates Franchise Costs, Fees, Profit and Data

franchise-deep-dive-studio-pilates-franchise-costs-fees-profit-and-data

How Car Sales Taught Buddy's Home Furnishings’ Mitchell Lee the Secrets of Franchise Development

how-car-sales-taught-buddys-home-furnishings-mitchell-lee-the-secrets-of-franchise-development

The Ace Up Their Sleeve: How Ace Handyman Services Matters Found the Perfect Partner in Ace Hardware

the-ace-up-their-sleeve-how-ace-handyman-services-matters-found-the-perfect-partner-in-ace-hardware

Florida Franchisee Reflects on Success and Growth with Sylvan Learning

florida-franchisee-reflects-on-success-and-growth-with-sylvan-learning

Domonique Downing - Big Frog Franchise - Fayetteville, GA - 1851 Franchise

Coca-Cola Scientist Finds Path to Autonomy with Big Frog Franchise in Fayetteville, Georgia

big-frog-franchise-fayetteville-georgia

Franchisee spotlight featuring Ian and Dick Rydholm with gradient blue background and Sylvan logo

Ian and Dick Rydholm Celebrate 30 Years of Transforming Lives Through Sylvan Learning in El Paso, Texas

ian-and-dick-rydholm-celebrate-30-years-of-transforming-lives-through-sylvan

Paris Baguette Ranks Among Top Franchises on Entrepreneur’s Franchise 500® for 2025 - 1851 Franchise

Paris Baguette Ranks Among Top Franchises on Entrepreneur’s Franchise 500® for 2025

paris-baguette-ranks-among-top-franchises-on-entrepreneurs-franchise-500-for-2025

Franchisee spotlight image with Randy and Sandy Craft, Children's Lighthouse logo on blue background

The Crafts’ Successful Journey from New Parents to Children’s Lighthouse Franchisees

the-crafts-successful-journey-from-new-parents-to-childrens-lighthouse-franchisees

Understanding Financial Performance Representations and Their Legal Ramifications

MORE STORIES LIKE THIS