Prospective franchisees have often been incorrectly told that federal law prohibits a franchisor from disclosing financial performance information to the prospect before becoming a franchise system member. The revised Federal Trade Commission Franchise Rule now requires that franchisors disclose they are legally permitted to provide financial performance information if they choose to do so. Only about 20% of franchisors made financial performance claims in 2006. Virtually all current disclosure documents and franchise agreements contain warnings that no one is authorized to make financial performance claims on behalf of the franchisor unless those claims have been included in the disclosure document. Also, warn you not to rely upon any undisclosed claims if they have been made to you.
The revised Rule also permits a franchisor to give financial results of chosen subsets of its franchise system. Of course, certain additional information must also be disclosed so as to permit the prospect to evaluate the claims which are being made. All financial performance information must now be disclosed within the disclosure document’s Item 19 and not through a separate document as was previously required by the original Rule. Notably, financial performance information no longer needs to be prepared in compliance with generally accepted accounting principles so long as the representations made are “reasonable.? This change represents a much looser standard. The revised Rule also makes clear that providing prospective costs or expenses alone does not constitute the provision of financial performance information.
What does this all mean to you, the prospective franchisee? You should read your franchise disclosure document carefully! While the franchisor may continue to refuse to disclose any financial performance information, it is now protected from complaints that it has made improper financial performance claims if it chooses to disclose only prospective costs or expenses. In such circumstances, the temptation will be great for a prospective franchisee to “fill in the blanks. Of missing revenue information to obtain a more complete picture of the financial performance of units within the system. However, the prospect will be doing so at its own risk.
Since July 1, 2008, compliance with the revised rule has been mandatory. In addition, various state laws may be amended to harmonize with the revised Rule.