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Franchise Legal Tip: Financial Performance Representations

One aspect of my practice consists of reviewing franchise disclosure documents for prospective franchisees.  Recently I reviewed a franchise disclosure document for a small franchise system.  As with any FDD I went over the various positives associated with the opportunity as well as the red flags and potential aspects that may be negotiable for the prospective franchisee.  Then we focused on the Item 19 financial performance representations ("FPR").  At first glance the FPR average gross yearly income seemed reasonable.  But on further inspection it was apparent that the only way the franchisee could profit would be if he personally and solely operated the franchise.  The prospect anticipated hiring an employee as was provided for in other items in the FDD.  Yet, factoring in the employee's salary (which was comparable to the going industry rate) it became apparent that the hiring of an employee would completely wipe out any income and in fact create a deficit.  Other items in the FDD such as Item 7 grossly understated the cost involved in hiring an employee and buried the costs in additonal funds.  The prospect, who was ready to sign up, quickly realized that his strategy would not work and moved on to reviewing other opportunities.

The tip from this is a bit apparent but often overlooked which is FPRs are excellent tools for assessing a potential opportunity but need to be carefully scrutinized with your business plan as well as analyzed in relation to the other items in the FDD, particulary items 5, 6 and 7. 

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Jeremy Liebman is an attorney with the law firm of Kaufman, Miller & Sivertsen, P.C. in Atlanta, Georgia. Jeremy graduated from Emory University School of Law where he was the coordinating director of the Emory Moot Court Society and was awarded its Most Outstanding Member Award. Jeremy advises franchising and distribution clients on all aspects of the franchise relationship, including both transactional law and litigation. Jeremy works alongside John Sivertsen, former General Counsel of Arby's Inc. and the former Assistant General Counsel of Burger King Corporation. This column is not intended as legal advice and should not be relied upon in any way. No attorney-client relationship exists.  You should contact an attorney to discuss your matter.

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Franchise Consultant