When franchisors have attractive financial performance metrics, they want to share the good news with prospective franchisees. Most franchisors know that they can provide financial performance data to prospective franchisees only if the data is contained in Item 19 of the franchisor’s Franchise Disclosure Document. What some franchisors don’t realize is that there are additional requirements to market their franchise offerings with the Item 19 data.
Section 436.9(c) of the Federal Trade Commission’s Franchise Rule is the provision that makes it an unfair or deceptive act or practice in violation of Section 5 of the Federal Trade Commission Act for any franchise seller to “disseminate any financial performance representations to prospective franchisees unless…the representation is included in Item 19 (§ 436.5(s)) of the franchisor’s disclosure document.”
Section 436.9(c) goes on to state that:
In conjunction with any such financial performance representation, the franchise seller shall also:
(1) Disclose the information required by §§ 436.5(s)(3)(ii)(B) and (E) of this part if the representation relates to the past performance of the franchisor’s outlets.
(2) Include a clear and conspicuous admonition that a new franchisee’s individual financial results may differ from the result stated in the financial performance representation.
The second part is straightforward. If a franchisor disseminates Item 19 data, the franchisor must “include a clear and conspicuous admonition that a new franchisee’s individual financial results may differ from the result stated in the financial performance representation.”
The first part takes a little unpacking, since it refers to other sections of the Franchise Rule. In effect, the first part states: If a franchisor disseminates Item 19 data that relates to past performance of the franchisor’s own outlets, then the franchisor must also include (1) “the dates when the reported level of financial performance was achieved” and (2) “of the outlets whose data were used in arriving at the representation, the number and percent that actually achieved the stated results”.
That satisfies the FTC’s Franchise Rule. Some states have their own requirements.