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More Item 19 Disclosures
Will Mean Increased Scrutiny

 

by Ed Teixeira

As more franchisors make a disclosure under Item 19 there will be an increased need for a careful review of the "numbers".

More franchisors continue to make a financial performance representation ("FRP") under Item 19 in their Franchise Disclosure Document ("FDD"). A recent report from FranchiseGrade.com indicates that over 63% of franchisors now include an FRP. If one were to go back over the past several years they will find that this increase is one of the more dramatic changes to take place in terms of franchise disclosure. The primary reason for the increase in FPRís has been attributed by industry analysts to several factors, with competitive factors being the most prevalent. Franchisors that fail to make an FPR are questioned as to why not and are often placed at a disadvantage versus those franchisors that do an FPR.

The FTC Rule allows the Item 19 disclosure to include a broad range of information that a prospective franchisee could use to identify or project future revenues, gross profits or net profits. The information in an FPR can run the gamut from franchisee revenues to the average number of guests that hotel franchisees process. In the case of one dry cleaning franchise, their Item 19 reports the average number of laundry in pounds processed by franchisees. Although the majority of FPR will depict more recognizable financial information, the increase in disclosures could lead in various directions, with some franchisors reporting odd metrics.

A significant outcome of increased FRPís in the FDD is the possibility that some franchisors will provide information that may require a more thorough analysis. A prospective franchisee may utilize this information to construct financial projections or worse accept as an expectation of their future performance.

The overall benefit and importance of more Item 19 disclosures canít be overstated, however, as these disclosures increase; the information should be carefully analyzed by candidates and their advisors. Put another way, a flawed Item 19 disclosure could be more damaging than none at all.

 

© 2015 FranchiseKnowHow, LLC

Ed Teixeira is the President of FranchiseKnowHow.com and Chief Operating Officer, FranchiseGrade.com. He is a former franchise executive and franchisee. He can be contacted at 631-246-5782 or at  franchiseknowhow@gmail.com

 

 

 

 

 

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