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

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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.

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Understanding Financial Performance Representations and Their Legal Ramifications

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