By Peter Snell
In the last issue of Canadian Business Franchise, this column presented the first in a series of articles that will examine the franchise disclosure document in Canada. This is a great time to revisit this topic, since six provinces will require disclosure in 2017, with British Columbia’s new Franchises Act having come into effect on February 1.
Disclosure documents provided by franchisors in Canada contain a wealth of information and provide an opportunity for prospective franchisees to gain valuable insight into franchise system operations. It is extremely important to take time to fully analyze the disclosure document and be ready to ask the franchisor any questions that arise from such review.
Also, the following information is merely intended to serve as a general overview. Prospective franchisees must also seek their own legal and accounting advice when reviewing a disclosure document. Only then can they obtain the specific information and advice relevant to their particular circumstances.
This issue’s column will discuss the franchisor’s earnings claims and projections, which are among the most controversial aspects of disclosure. Simply put, an earnings claim is the franchisor’s answer to the franchisee’s question, ‘How much money can I make?’
Historically, many franchisors have not been willing to answer this question. Today, however, more of them are willing to provide useful representations of their system’s financial performance. It is worthwhile to consider why this trend has changed.
What every prospective franchisee wants to know
Franchisors will universally agree the question ‘How much money can I make?’ is one of the first every prospective franchisee will ask them. This is understandable, given a franchisee will invest thousands of dollars—sometimes even millions—into the franchised business and wants to ensure a healthy return.
Indeed, it is only natural to want to understand how profitable a given venture can be. And the question may seem simple and straightforward. The answer, however, is often very complex.
The franchisor’s sales force is put in a difficult position. On one hand, their job is to generate enthusiasm and sell franchises, but on the other, they have to be careful not to ‘oversell’ the business concept and create unrealistic expectations for the prospective franchisee, as this could potentially lead to legal liability for the franchisor.
If a salesperson exaggerates how wonderful a franchise system is, then the prospective franchisee may, to his/her detriment, rely too heavily on this information. And when franchisees’ expectations are not met, they are understandably disappointed and often disenchanted with the system, to the point where they may even regret their decision to buy a franchise in the first place. This is certainly not the way the franchisor wants to embark on its relationships with new franchisees.
Taking this issue even further, franchisees who are given inaccurate or improperly disclosed financial performance information may look into suing the franchisor for misrepresentation or seek to rescind their franchise agreement, if they are based in one of the six provinces with franchise disclosure legislation.