Earnings Claims and Franchise Disputes: Franchises are not unlike other businesses that involve relationships. Not surprisingly, the central relationship in a franchise between the franchisor and franchisee can be the basis of any number of disputes. Some of these disputes could have been avoided with a fair amount of due diligence before the franchise relationship was established and the purchase of the franchise. Other disputes are a result of poor communication between the franchisee and the franchisor. One area of dispute that is not uncommon among franchisees is the claim that the franchise is not making the amount of money that the franchisee expected from the franchise. This could be based on miscommunication, but franchisees will often claim that the earning potential of the franchise was misrepresentated at the time of purchase.
Financial Performance Representations. One of the most frequent questions franchisors are asked by franchisees is "how much money will I make?" Indeed, it is not surprising that franchisees purchase franchises in the hope of making alot of money. There are a number of challenges in responding to this question but a growing number are not afraid to make earnings claims.
Earnings claims as they were typically called have been revised under the FTC (Federal Trade Commission) Rule so that they are now referred to as Financial Performance Representations. Item 19 of the UFOC pertains to any disclosure that a franchisor might wish to make about the actual or potential financial performance. Despite a trend to become more open, there are so many factors that can affect the performance of any particular franchise that many franchisors are still unwilling to provide specific numbers. Location, the age of the franchise system, individual effort, economic changes or other aspects of running a business could affect performance. Past earnings may not be a good predictor of future performance of the franchise in question.
Financial Performance Representations-Franchisees. Sometimes franchise sales people provide financial information to a prospective franchisee to close the sale that the franchisee will rely upon to make the purchase of the franchise. However, some of the franchisees that come to our office have nothing in writing to confirm the representation upon which they claim to have based their purchase. It is often an understatement that they are very disappointed when the franchise does not perform up to their expectations. Moreover, they will often find when they present the Franchise Agreement and the UFOC that the franchisor has made clear that no earnings claims were made with respect to the financial performance of the franchise. This underscores one more reason for franchisees to seek a franchise attorney prior to the purchase of their franchise to make sure that the franchise documentation reflects the assumptions under which the franchise is to be be purchased.
Financial Performance Representations-Franchisors. As franchisees become more sophisticated, many franchisors feel a pressure to disclose more information regarding the earning potential of the franchise. The franchise market has become more competitive as franchisors compete for a relatively small group of well qualified franchisees. Newer franchises in particular may have a harder time gaining the confidence of these franchisees if they do not have an established brand. Franchisors should examine the risks involved in providing financial performance information, the manner and accuracy of such information and make sure that it is in compliance with applicable legal requirements. If the franchisor decides not to include such information, they can also consider language that the franchisee must sign indicating that no financial representations were made in the course of the sale of the franchise to counterbalance
One area of dispute that is not uncommon among franchisees is the claim that the franchise is not making the amount of money that the franchisee expected from the franchise.
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