In order to sell franchises, franchisors are required to supply potential franchisees with a Franchise Disclosure Document, or FDD. Item 19 of the FDD permits franchisors to include representations about financial performance, but franchisors are not required to do so. If the franchisor does not provide financial representations in Item 19, you will see the following statement in the FDD:
We do not make any representations about a franchisee’s future financial performance or the past financial performance of company-owned or franchised outlets. We also do not authorize our employees or representatives to make any such representations either orally or in writing. If you are purchasing an existing outlet, however, we may provide you with the actual records of that outlet. If you receive any other financial performance information or projections of your future income, you should report it to the franchisor’s management by contacting [name, address, and telephone number], the Federal Trade Commission, and the appropriate state regulatory agencies.
If you see this statement in Item 19, be sure to ask the franchisor why it chose not to provide financial representations, especially if they have been in business for a long time.
Any time you purchase any business, there is risk involved and so you must calculate the expected value of the purchase in order to make a well-reasoned decision regarding the inherent risk. You must make the decision based off of the underlying business model and the expected value you can reasonably believe you will be getting as part of this system, and not make a decision based on emotion or based on the actual product or service that you are selling. If the franchisor elects not to provide financial representations, it can be a bit more difficult to calculate the expected value of the purchase, especially since the franchisor is prohibited from making financial representations if it elects not to provide them in Item 19 of the FDD. However, this is where it becomes extremely important to do your due diligence and ask the franchisor and current and former franchisees any questions you may have regarding all aspects of the franchise system before you decide to buy and, by doing so, you should be able to get a better sense of the expected value for the purchase before moving forward with the decision.
