What is An UnLawful Earnings Claim?

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A "financial performance representation," also called an "FPR," is any representation, whether oral, visual or written, to a prospect that states, expressly or by implication, a specific level or range of actual or potential sales, income, gross profits or net profits .

If the franchisor states in Item 19 of its FDD states that it and its representatives do not make FPRs to prospects, you must avoid making any oral, visual or written FPR to a prospect outside of the FDD.

If the franchisor includes FPRs in Item 19 of its FDD, you may discuss any FPR in Item 19 with a prospect, but you must avoid making any oral, visual or written FPR to a prospect that is not in Item 19. For example, if Item 19 gives the average annual sales of outlets open in the previous year, you are prohibited from representing orally that average sales in the current year have exceeded average sales in the previous year, since that oral representation is not supported in Item 19.

Here are some examples of FPRs outside of an FDD that must be avoided:

  • A chart, table or mathematical calculation that shows possible results based on a combination of variables.

  • A software program containing a spreadsheet with assumed cost percentages.

  • A copy of a published article which states that some franchisees have earned a specified amount.

  • A pro forma showing assumed low, medium and high sales and costs based on actual average cost percentages.

  • "You will earn enough to be own a new Porsche within a year."

  • "You will break even within 6 to 9 months."

  • "Your sales will increase 20% to 30% if you convert to be a franchised outlet."

  • "The sales and cost projections in the pro forma prepared by your accountant look reasonable to me."

  • "You are likely to realize a 100% return on investment within the first year of operation."

    Here are some examples of statements related to sales, profits and costs that likely are not FPRs, subject, of course, to the full context of what is said to a prospect:

  • "This franchise offers exceptional profit potential."

  • "Your sales will depend on your location and how much effort you put into the business."

  • "If you want to know about typical sales, profits and costs, you should talk with our franchisees."

  • "This is an opportunity of a lifetime."

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Warren correctly points out this illegal earnings claim technique:

"A copy of a published article which states that some franchisees have earned a specified amount."

It appears to me, that there are entire magazines devoted to being an accomplice to the franchisor's sales efforts.

Often franchisors think that they can do in an article what they are prohibited from doing in making earnings claims in any other medium.

They are mistaken and reckless.

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About this Entry

This page contains a single entry by Warren Lewis published on July 7, 2013 7:33 PM.

Do You Make this Common Mistake with Your Franchise Concept? was the previous entry in this blog.

Self-Interest Won't Keep Chinese Partners Honest is the next entry in this blog.

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