ITEM 19

A franchise opportunity can only be offered or sold through disclosure of a franchise disclosure document ("FDD").  In fact, it is an unlawful and deceptive trade practice for any franchisor to attempt to offer or sale a franchise without disclosing the FDD. The federal Franchise Rule requires all franchisors to disclose certain information relating to the franchised business and its management. These disclosures are made in the FDD through 23 separate Items. 

Item 19 deals with financial performance representations. No financial performance representation can be made by a Franchisor unless the information is disclosed in FDD Item 19.  Under the Franchise Rule, franchisors are permitted to make either:

•  a standard disclosure indicating they do not make any financial performance representation; or 
• a standard disclosure coupled with certain financial information specific to company owned outlets, franchised outlets, or certain subsets of outlets.   

Every FDD Item 19 is required to start the same way: 

The FTC's Franchise Rule permits a franchisor to provide information about the actual or potential financial performance of its franchised and/or franchisor-owned outlets, if there is a reasonable basis for the information, and if the information is included in the disclosure document. Financial performance information that differs from that included in Item 19 may be given only if: (1) a franchisor provides the actual records of an existing outlet you are considering buying; or (2) a franchisor supplements the information provided in this Item 19, for example, by providing information about possible performance at a particular location or under particular circumstances

Franchise Rule, Item 19

If the franchisor does not make any financial performance representation, FDD Item 19 is required to also state:

We do not make any representations about a franchisee's future financial performance or the past financial performance of company-owned or franchised outlets. We also do not authorize our employees or representatives to make any such representations either orally or in writing. If you are purchasing an existing outlet, however, we may provide you with the actual records of that outlet. If you receive any other financial performance information or projections of your future income, you should report it to the franchisor's management by contacting [name, address, and telephone number], the Federal Trade Commission, and the appropriate state regulatory agencies.

Franchise Rule, Item 19

FDD Item 19 may contain financial information based on historical financial performance or a forecast of prospective financial performance.  However, no representation can be made unless the franchisor has a reasonable basis and written substantiation for the representation at the time the representation is made.  If a representation is made, it must comply with each of the Franchise Rule's requirements and franchisors must be careful not to provide information (or exclude information) that may be misleading to prospective buyers.

When a franchisor makes a financial performance representation based on the actual history of company outlets, franchised outlets, or a subset of franchised outlets - they must follow certain perimeters.  The Franchise Rule requires disclosure of:

1. Whether the representation relates to the performance of all of the franchise system's existing outlets or only to a subset of outlets that share a particular set of characteristics (for example, geographic location, type of location (such as free standing vs. shopping center), degree of competition, length of time the outlets have operated, services or goods sold, services supplied by the franchisor, and whether the outlets are franchised or franchisor-owned or operated). 
2. The dates when the reported level of financial performance was achieved. 
3. The total number of outlets that existed in the relevant period and, if different, the number of outlets that had the described characteristics. 
4. The number of outlets with the described characteristics whose actual financial performance data were used in arriving at the representation. 
5. Of those outlets whose data were used in arriving at the representation, the number and percent that actually attained or surpassed the stated results. 
6. Characteristics of the included outlets, such as those characteristics noted in (1), that may differ materially from those of the outlet that may be offered to a prospective franchisee.

Franchise Rule, Item 19

The Franchise Rule sets perimeters and the FTC establishes compliance guidelines that provide additional direction to franchisors.  The North American Securities Administrators Association ("NASAA") also provides guidance and facilitates established policies between franchise registration states. Statistics, particularly in isolation, can be misleading. To avoid this, there are basic rules, such as if a franchisor discloses the "average" they must also disclose the median, and highest and lowest numbers in the range.  Some franchisors choose to provide additional information, such as rent or cost of goods.  

When a franchisor makes a financial performance representation based on a forecast - they must follow certain perimeters.  The Franchise Rule requires disclosure of the material bases and assumptions on which the projection is based. 

• The material assumptions underlying a forecast include significant factors upon which a franchisee's future results are expected to depend. These factors include, for example, economic or market conditions that are basic to a franchisee's operation, and encompass matters affecting, among other things, a franchisee's sales, the cost of goods or services sold, and operating expenses.

Franchise Rule, Item 19

When a financial performance representation is made by the franchisor, the Franchise Rule also requires:

1. A clear and conspicuous admonition that a new franchisee's individual financial results may differ from the result stated in the financial performance representation.  Specific words are required by Commentary and franchisors may not include any statement that attempts to disclaim the information provided or state that a franchisee many not rely on the information presented.  
2. A statement that written substantiation for the financial performance representation will be made available to the prospective franchisee upon reasonable request.

Franchisors often include clauses in the franchise agreement or in questionnaires in an attempt to mitigate and disclaim liability. Effective January 1, 2023, the ability to do so is limited.  Franchisors must include the following statement in the FDD and franchise agreement:

No statement, questionnaire, or acknowledgment signed or agreed to by a franchisee in connection with the commencement of the franchise relationship shall have the effect of (i) waiving any claims under any applicable state franchise law, including fraud in the inducement, or (ii) disclaiming reliance on any statement made by any franchisor, franchise seller, or other person acting on behalf of the franchisor. This provision supersedes any other term of any document executed in connection with the franchise. 

NASAA STATEMENT OF POLICY REGARDING THE USE OF FRANCHISE QUESTIONNAIRES AND ACKNOWLEDGMENTS

It depends. There are many factors that go into making the decision to include or exclude specific financial performance representations. During the FDD creation process, franchise attorneys work with franchisors to understand the business, sales goals and procedures, staff, and risk tolerance. Franchise attorneys provide the information franchisors need to make an informed decision.