Franchisors Shouldn’t Hold Back on Financial Disclosure
by Ed Teixeira
It’s important that franchisors disclose as much meaningful financial
information about their franchise opportunity as possible. Providing franchise
candidates this kind of information can prevent future franchisee problems from
Recently, I received a telephone call from an individual looking to purchase
a franchise. The person received my newsletter and asked if I could answer an
important question. He explained that he was considering several locations to
lease space for a franchise. He had contacted the franchisor about operating
costs. In particular, he was seeking some information regarding the costs for
leasing retail space. According to the prospect the franchisor told him that he
couldn’t provide any cost or expense data other than the information contained
in the FDD. My first response was to ask if he was represented by a franchise
attorney. His response: “Not yet.”
I explained to him, that under the Revised Franchise Rule, cost and expense
data was not considered to be a financial performance representation. I provided
a quick overview of the FDD and in particular Item 19, explaining how the
previous regulations were strict and somewhat ambiguous when it came to
financial disclosure. Now, franchisors can disclose expense and cost data, which
should help franchise prospects make a more informed decision. My admonition to
the individual was to seriously consider whether he should proceed in purchasing
This isn’t the first time this situation has come up. Franchisors that hide
under the previous Item 19 requirements are either ignorant of what they can and
cannot disclose or are patently withholding important information from the
franchise candidate. If the franchisor is a start-up then they should have some
information from their pilot operation.
Following is the guidance contained in the FTC Compliance Guide
16 C.F.R. Part 436
Does Cost Information Constitute a Financial Performance Representation?
The presentation of cost or expense data alone is not a financial performance
representation. Accordingly, the disclosure of fees, required purchases, and
expenses reported in Items 5 through 7 ordinarily will not constitute a
financial performance claim that would have to be disclosed in Item 19.
Nevertheless, a presentation of cost data, coupled with additional sales or
earnings figures, from which prospective franchisees could readily calculate
average net profits, is a financial performance representation, and does trigger
the Item 19 disclosure obligation.
This experience caused me to consider why franchisors should disclose more
cost and expense data, providing they comply with the FDD disclosure
- Enables the prospect to construct a more accurate
break even and cash flow analysis.
- If the franchisor provides this information to candidates it
will enable the franchisor to more effectively qualify
prospects. For example, how did the candidate incorporate this
information into their financial models?
- A good amount of franchisee start-up problems and potential
failures are caused by under estimating expenses as much as poor
- When expense and cost information is not fully disclosed
it’s only a matter of time before the franchisee has the correct
- The franchisor should provide prospective franchisees as
much cost information as allowed since it can assist the
candidate in their decision making.
For some reason, certain franchisors fail to disclose particular franchise
cost information despite being allowed to do so. Disclosing this information can
increase the probability that both parties make the right decision.
© 2011 FranchiseKnowHow, LLC
Ed Teixeira is the President of FranchiseKnowHow, LLC.
He can be reached at