Can You Afford to Pay the FTC $100k or More?

As Chief Development Officer for a capital intensive franchise, I knew that we had an advantage in the marketplace - we could tell franchise candidates how much money they could make - because of our Item 19, or what is now called a "Financial Performance Represenation".

But we had a problem. While our ads in the Wall Street Journal could explain our business model and make representations consistent with our FPR, we had to be compliant with the FTC Rules on Misleading Advertising. We had a great average unit volume story, AUV, and we just had to tell it in the right way.

I knew all of this, wrote the ad & added the FTC required disclaimer -sent the ad to our legal counsel. We were "experts" on compliant franchise sales.

It was great! We had a terrific response, and we were in compliance with the law.

My joy was short lived -replaced with nerve racking fear. Our great advertising success was about to become a liability that would kill the franchisor!

A competitor of ours phoned me up. Here is their story. "Joe, saw the ad you were running. Just a word to the wise. We ran the exact same type of ad, pulled information from our FPR, and inserted the standard FTC disclaimer language. The next thing we heard was not from a happy or excited franchise candidate, but from the dour FTC. We had forgotten something. And it was going to kill us.

We didn't put on the ads the number of units and percentage that they represented which reached or exceeded the AUV. And the FTC wanted $11,000 for each ad we ran because of that one infraction. Just a word to the wise."

Now, we never got that call from the FTC. Thank heavens. But, I sure moved quickly to change the ad so that we told franchise candidates not only the AUV, how much they could make, but how many units were hitting that mark, and what percentage of the system they represented.

The joy returned. Our aggressive ads were working.

I still see franchisors advertising and selecting figures from their FPR, but either leaving out the disclaimer language or forgetting to put in the number of units and percentage they represent. I guess that they can afford the FTC fine - but I know we couldn't.

I was thankful that a competitor who was marketing with their Financial Performance Representation - FPR in their advertising as we were, was thoughtful enough to let us know. This way we could avoid the pain of having to pay the FTC fines of well over $100,000, at $11,000 per infraction, and have our reputation needlessly damaged.

So if you see a franchisor marketing with non-compliant sales claims in their advertisements do them a favor and give them a heads up so they can make a quick and easy fix. Feel free to send them this article.

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