ITEM 19 OF THE FRANCHISE DISCLOSURE DOCUMENT (FDD)
Background On New NASAA Guidelines to Item 19 of the FDD
New guidelines for Item 19 of the Franchise Disclosure Document (FDD) on Financial Performance Representations (FPRs) will benefit franchisors, franchisees and sales consultants. These new guidelines go into effect early in 2017 (http://www.nasaa.org/40282/notice-request-comments-regarding-proposed-franchise-commentary-financial-performance-representations/). The new guidelines are very specific in the requirements that must be included in Item 19 of the FDD. The guidelines specify what a new franchisor, without franchisees, may disclose about the earnings of its company outlets. Additionally, it specifies what established franchise systems may represent about their franchisee’s financial performance. These guidelines will create a more uniform approach to Item 19 representations that will benefit the entire industry.
The new guidelines for Item 19 of the Franchise Disclosure Document (FDD) will benefit franchisors. Creating uniformity of Item 19 financial performance representations will be advantageous to both the franchisors and franchisees. For franchisors it creates a very specific guideline on what can and cannot be included in the FPR. Additionally it specifies the method of displaying and calculating the dollars that are used. It will now be mandated whether to use averages, medians or highs and lows. Prior guidelines merely indicated that a franchisor must have a “reasonable basis” for the financial performance representations made in Item 19 of the FDD. This was vaguely defined and left a lot of discretion to each franchisor.
The new guidelines for Item 19 of the Franchise Disclosure Document (FDD) will also benefit prospective franchisees. Now a prospective franchisee can review an FDD and see consistency from one Item 19 disclosure to another. A prospective franchisee will be able to compare financial performance representations from one franchisor against those of another and know that the m
ethodology used to calculate the numbers is consistent. This allows the prospective franchisee to make better and more informed decisions before investing in a franchise
Franchise Sales Perspective
Lastly, the new guidelines for Item 19 of the Franchise Disclosure Document (FDD) is great news for franchise sales individuals. Having consistent methods of calculating the financial performance representations in Item 19 will mean that a franchise consultant or sales person will be confident that the numbers have a legitimate basis and are derived uniformly from one system to the next. A franchise consultant will be able to encourage a candidate of theirs to review the Item 19 disclosure knowing the numbers have meaning.
I applaud NASAA for taking this next step in creating more uniformity in the FDD. I think this will be a “win win” for franchisors, franchisees and franchise sales people.