Larger franchise systems with over 100 locations are more likely to offer financial performance representations (FPR) than smaller franchise systems and of late, the number of detailed disclosures in Item 19 is moving up. Why is elaborating more fully on Item 19 becoming more important if franchise brands want to expand?
For one thing, the vast majority of those considering entering into a franchise agreement want to know (read: need to know) how much profit they can expect when running the business. This fact alone is enough to drive up disclosure in the area of financial performance.
Over half of FDDs last year, at around 68%, featured an FPR rather than a negative representation declining to offer any financial projections for franchisees to base their potential performance on. This figure has risen from about 25-30% in recent years.
With this kind of FPR increase, franchises that opt to avoid disclosing financial information in Item 19 may face stiff competition amidst franchises that are strategically keeping track of and disclosing financial information in Item 19.
Additionally, franchisors weighing the costs versus benefits of using an FPR may find that detailed research and verification of the figures and timelines used in the Item 19, though not without expense, render franchisees more interested in making an investment that they feel good about over time. Alternately, a poorly executed FRP or one that is missing altogether is more likely to promote future grievances and complicate how franchise marketing and sales to potential franchisees down the line.
For some franchisors, especially newly developed or those operating with fewer locations, omitting an FPR may seem like a safer option than enduring the challenges of organizing one that can be relied upon in the first place. On the other hand, what could be more worrisome—an aspect particularly relevant for newer businesses looking to franchise their concept—is realizing that franchising may not be the ideal direction after research clarifying the FPR reveals a less than appealing profit.