According to a recent article from Franchise Times, some franchisors may choose not to make Item 19 financial disclosures as a result of the COVID-19 pandemic. While franchisors have the option to either provide a financial performance representation (FPR) or make a “negative disclosure” in Item 19, FPRs provide important insights for prospective franchisees who need to gather as much information about franchise opportunities as possible. Here, franchise attorney Jeffrey M. Goldstein provides an overview of why some franchisors will likely forego making FPRs in 2021 and what this means for franchise buyers.
Why Are Some Franchisors Unlikely to Make FPRs Based on 2020 and 2021 Financial Data?
The Franchise Times article quotes several franchisor attorneys who share their thoughts on why making FPRs based on data from the COVID-19 era may be risky for franchisors. The general sentiment is that since the COVID-19 pandemic has had a drastic financial impact on many franchise systems, financial performance data from 2020 and 2021 might not necessarily be representative of what franchisees can expect to earn in the future.
While this may or may not be true – at this point, it is still unclear how long the economic impacts of the COVID-19 pandemic will last – prospective franchisees could still benefit greatly from reviewing updated FPRs. The article also expresses concern that the data from 2020 and 2021 might not be “replicable,” and that this could lead to trouble for franchisors (especially for those that experienced what Franchise Times terms the “COVID bump”). However, franchisors already include plenty of disclaimers with their FPRs, including disclaimers that make clear that past performance is not necessarily indicative of future results.
If a Franchisor Does Not Provide an FPR in Item 19, Where Can Prospective Franchisees Find Financial Performance Data?
If a franchisor does not include an FPR in its Franchise Disclosure Document (FDD), where can prospective franchisees find financial performance data? There are a few potential options, although none serve as direct replacements to affirmative Item 19 disclosures. For example, prospective franchisees may be able to gather insights into a franchise system’s financial performance by:
- Talking to Current Franchisees – Some current franchisees may be willing to share information about their outlets’ financial performance, although it will be important to consider the relevance of any data provided by franchisees in far-flung geographic areas.
- Talking to Former Franchisees – Former franchisees are generally more willing to discuss the financial aspects of their franchises’ operations.
- Reviewing Past FDDs – Your franchise attorney may be able to obtain copies of the franchisor’s most-recent past FDD so that you can review the franchisor’s pre-pandemic financial performance representation.
Discuss Your Franchise Opportunity with National Franchise Attorney Jeffrey M. Goldstein
Are you thinking about buying a franchise? The Goldstein Law Firm offers four fixed-fee franchise business review programs for prospective franchisees. To discuss your franchise opportunity with national franchise attorney Jeffrey M. Goldstein in confidence, please call 202-293-3947 or request a free consultation online now.