FDD Item 19 — Financial Performance Representations
Financial Performance Disclosure StandardsThe franchise laws always allowed financial performance information as long as there's a "reasonable basis" and the financial information was contained in the FDD, along with substantiation for the information (i.e. where it came from).
Under the new FTC Rule, Item 19 of the FDD must now begin with a REQUIRED STATEMENT, that sets the record straight:
"THE FTC FRANCHISE RULE PERMITS A FRANCHISER TO PROVIDE INFORMATION ABOUT THE ACTUAL OR POTENTIAL FINANCIAL PERFORMANCE OF ITS FRANCHISE AND/OR FRANCHISER-OWNED OUTLETS IF THERE IS A REASONABLE BASIS FOR THE INFORMATION AND IF THE INFORMATION IS INCLUDED IN THE DISCLOSURE DOCUMENT."
Item 19 - Financial Projections vs. Financial ResultsTo be fair, it's quite understandable why franchise companies don't like to make POTENTIAL financial performance representations. These are financial projections, a guess of future potential that may or may not happen in most cases. Predicting the future, after all, is the forte of fortune tellers . . . and investment bankers.
But it's important to remember there are two alternate prongs: potential financial performance or ACTUAL financial performance. The reason not to make actual financial performance data available, when they know to the dollar what their franchises and company-owned outlets are making (or losing), is highly suspect. That is, unless the financial picture is not very rosy -- then it makes a lot of sense not to include this information in Item 19. Who is going to buy their franchise and invest hundreds of thousands of dollars to try and get it profitable if the actual financial results showed most franchise owners were barely breaking even or posting a loss?
Item 19 - Don't Jump Into A Black HoleIf I'm buying a franchise, and a franchise company refuses to provide the most basic financial information for me to make an informed investment decision, that's a huge red flag. It tells me a lot about them and about the financial condition of their franchise network. Would anyone with common sense jump into a big, black hole? Surprisingly, a lot of first-time franchise buyers, influenced by the emotional ploys of the franchise salesperson, don't see the need to spend any money on up front business or legal advice. They jump right in.
Why Talking To Existing Franchise Owners Is Not An Effective AlternativeMost franchise companies who don't share financial information in Item 19 point to the list of their franchise owners in the FDD as the "best way" to get the information they refuse to provide. The big problem with this approach is most franchise owners either don't give financial information to a stranger, or exaggerate their performance. I've talked with hundreds of franchise owners over the years who all say they're making "good money" when a studied examination of their actual financials show below minimum wage performance or operating in the red. It's human nature -- people don't like to admit they made a mistake and are a failure.
McDonalds FDD Item 19Using McDonalds as a benchmark is always a good thing in the world of franchising. Unlike other franchise companies that elect to say "nothing" in Item 19, ("Where are our badges? We don't need no badges. . . We don't have to show you no stinking badges." - line from John Huston's 1948 classic movie "The Treasure of the Sierra Madre") McDonalds steps up to the plate and provides detailed franchise earnings information about sales, profits and operating expenses for its restaurants. Cost of sales, gross profit and operating profit are shown for restaurants that hit three different sales levels - $2 million, $2.2 million and $2.4 million. The average sales volume of traditional McDonalds restaurants in the U.S. open at least one year was $2.3 million in 2008. To obtain Item 19 of the McDonalds FDD, or the entire 375-page McDonalds FDD, a treasure trove of information, click on the link below.