By Jack Eberenz
The most litigated provision in the Franchise Disclosure Document (FDD) is the Financial Performance Representations (FPRs), otherwise known as Item 19.
To protect themselves, some franchisors choose to make no financial representations at all, even though this might turn a good prospect into a “No Sale”. However a “blank” Item 19, even when coupled with a signed statement from the buyer that they did not receive any financial performance representations from the seller, is not a guarantee you won’t be sued in the future. Let me relate the “Napkin Incident”.
The incident – which has happened more than once – has become something of a legend in the franchising business. Here’s how it goes:
The franchisor’s sales rep is having lunch with a prospect. The discussion turns to how much money the prospect can make. The salesperson, remembering the company’s Item 19, but desperately wanting a sale to collect the commission says, “I can’t talk about revenues or profits but let me show you an example of one franchisee.” At this point he takes the paper napkin and begins to write down some revenues and expenses. Voila, the franchisee sees the profits unfold before their eyes. The lunch is over and the prospect is impressed and buys the franchise.
Two years later the franchisee is struggling and has not realized the revenue or profit numbers that were on that old napkin. So he sues the company for false representations made apart from the FDD. Then lo and behold, the napkin shows up carefully framed under glass. The franchisee pocketed the napkin at lunch and kept it for years “just in case”. Try convincing a judge or jury that this napkin was not a financial performance representation.
Your lawyer can protect you as much as possible with a well-constructed FDD. But you need to carefully control what you and your sales reps say to a prospect.