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Understanding the Disclosure Document: Earnings claims and projections

Busionesswoman On A WorkplaceBy Peter Snell
This column will examine the franchise disclosure document in Canada. With New Brunswick’s disclosure obligations now in force, four provinces now require franchise disclosure.

Disclosure documents provided by franchise systems in Canada contain a wealth of information, which allows prospective franchisees an opportunity to gain valuable insight into the franchisor’s operations. It is extremely important you take the time to fully analyze the disclosure document and be ready to ask the franchisor any questions that arise from your review. Also, while the following information serves as a general overview, you must also seek your own legal and accounting advice when reviewing a disclosure document. Only then can you obtain the specific information and advice relevant to your particular circumstances.

This article will look at one of the most controversial aspects of franchise disclosure: earnings claims and projections. In plain English, an earnings claim is the answer to the question ‘How much money will I make?’ Most franchisors are not willing to answer this question—but why?

How much money will I make?
Franchisors universally agree this is one of the first questions a prospective franchisee will ask. This is understandable, given the individual is looking to invest tens, if not hundreds, of thousands of dollars in the franchised business. It’s only natural to want an understanding of how profitable the venture will be. However, while this seems like a simple and straightforward question, the answer is often very complex.

The franchisor’s sales force is in a difficult position. On the one hand, their job is to generate enthusiasm and sell franchises. On the other, they have to be careful not to ‘oversell’ and create unrealistic expectations for the prospective franchisee, as this can create potential legal liability for the franchisor. If a salesperson exaggerates about how wonderful the system is, the prospective franchisee may, to his or her detriment, rely too heavily on this information. When expectations are not met, franchisees are understandably disappointed, often disenchanted with the system and may even regret their decision to buy a franchise. This is certainly not the way any successful franchisor wants to embark on its relationship with new franchisees.

Taking this even further, franchisees who are given inaccurate information may also look to sue the franchisor for misrepresentation or seek to rescind the agreement if they are in one of the four provinces with franchise disclosure legislation.

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