So you’ve decided to buy a franchise. You’ve done your research, and have narrowed it down to a short list of companies that excite you personally, are profitable, and have management teams you are willing to bank on.
Still, you haven’t answered the most important question: What can I earn? Obviously, the main reason most people buy franchises is to earn money, but no good franchisor would ever answer that question directly. They would have far too much liability if they did. A franchisor should instead provide you with some guidance to help you make that estimate for yourself. The key to making that calculation starts with something called the “financial performance representation,” or FPR.
Where would you find the FPR? In many Franchise Disclosure Documents (FDDs), which a franchise will provide when you’re considering becoming a franchisee, you will find the FPR in Item 19. Almost always, the FPR focuses on historical results that have been achieved by the franchisor, its affiliates, its franchisees, or some combination of the three. The FPR may come in the form of an income statement, but more often, it will focus on some of the key variables that will dictate income (and will enable you to develop a pro forma income statement based on those variables). The format and utility of these FPRs vary from franchisor to franchisor.
Be aware that franchisors are not required to provide their franchisees with an FPR. In the early days of franchising, the use of an FPR (then called an earnings claim) was more the exception than the rule. In fact, in the late 1980s and early 1990s, less than 20% of franchisors provided one. Many were reluctant to share this data out of fear that it would result in litigation and were often warned against it by their lawyers. But over the past few decades, there has been a strong reversal of opinion on FPRs; by most estimates, the majority of franchisors provide at least some information in Item 19. In a 2018 study that looked at 1,497 FDDs, Rob Bond, president of the World Franchising Network, found that 61% included some kind of FPR.
Why no FPR?
If a franchisor does not have an FPR, its absence will make it difficult for you to estimate your revenues and profits. And while the uncertainty of your projections will increase your risk, that does not necessarily mean you should immediately eliminate the franchise opportunity from consideration.
The (good and bad) reasons franchisors might not provide an FPR:
1/The franchisor may believe the units it could use for an FPR are, for some reason, not typical of what a franchisee might expect to make. In fact, it may believe its own performance will be stronger than the performance of the franchisee and may have avoided the FPR in order to be more conservative. For example, perhaps a given franchisor has a unique location or has been in business for decades serving one community where the brand has become iconic. Perhaps the franchisor is franchising only part of its current operation, based on the belief that the franchisee needs to start with a less complicated business (perhaps evolving later to a fuller line of products or services).
/The franchisor may
