The purpose of a Financial Performance Representation (FPR) is to give a franchisee accurate insight into the revenues and possibly the related costs of operating a franchised location. Just like we recommend you over-estimate the costs of opening a location so a franchisee is properly capitalized, you should be conservative in presenting revenue figures, so a franchisee has realistic expectations.
The first question many franchise prospects ask is “how much can I make?” And although it’s an important question, it’s one of the least important questions. A prospect first needs to understand the relationship they have with you. They need to understand your culture and vision and be sure they embrace your concept 100% before they worry about how much they can make. If they move forward based upon how much they can make before feeling 100% comfortable with everything else, it can easily turn into a bad situation for both of you. There is a reason why the FPR is Item 19 of 23 in the FDD — Items 1 – 18 are more important!
So how do you answer the question “how much can I make”? You tell the prospect that it is entirely up to them. If you have an FPR, those numbers are for locations that have different operators and have been open for variable amounts of time. You, as the franchisor, created a system. Your job as the franchisor is to provide the product, systems, processes, recipes, marketing materials, training and continuous support and improvements to the system. The franchisee’s job is to utilize those products, systems, processes, recipes, marketing materials and training and support to make their business successful. It’s your brand, but it’s their business. Remind them that the required minimums are just that, minimums. The more they put into their business, the more they will get out of it.
If you do have an FPR, it speaks for itself. You don’t need to go into any additional detail. As you grow, a prospect can ask more detailed questions of existing franchisees.
When going through the process with a prospect, stick to the facts that are in the FDD. Don’t review their pro-forma. Don’t try to help them come up with revenue figures by saying if you have X number of customers and each spends an average of X dollars… Follow up any conversations with an email to document what you discussed.
FPRs are a highly litigated area in franchising. The best thing you can do if you are unsure is to err on the side of caution.