Item 19 Financial Performance Representations (FPR) are a key component for performing franchisee due diligence. An FPR allows a prospective franchisee to analyze a franchise investment and the opportunity for a return. An FPR is critical in constructing a pro forma income statement and cash flow projections for a franchise investment.
There has been a marked increase over the last 5 years in the number of franchise systems that now provide an Item 19. This trend will likely continue as industry professionals continue to promote the need for an Item 19 FPR. A number of communications are advocating that a prospective franchisee should not consider any franchise system as a potential investment unless that system provides an Item 19.
From a sample of 2000 FDDs from 2014, 1015 franchise systems provided an Item 19 FPR. Those franchise systems represent 257,538 franchisees or 63% of all franchisees in the sample.
Our research also shows that franchisors who include an Item 19 FPR in their FDD had a distinct advantage over their competition as evidenced by new franchise growth.
We have completed a study on the changes in Ongoing Fees in the franchise industry using our data from 2013 – 2016 to publish the report.
A Franchise Disclosure Document (“FDD”) presents key components of the franchise program including the obligations of the franchisor and franchisees.
As franchise system development becomes more competitive franchise systems are employing a new strategy to grow their brand and increase franchise sales.
The composition of the franchise investment differs in key areas such as: franchise fees, royalty rates, territory protections and Item 19 disclosures.
Data has become essential to having a successful franchise development team. Those that maximize the power of data will sell more franchises.
When reviewing an FDD, we always keep our eyes out for any errors. The error that is the most troublesome for us is when we see Item 20 errors.