'How much money can I make?'. That seems like a
fair enough question for a franchisee to ask of a franchisor.
After all, the franchisee will be paying a healthy premium for the
right to do business under the franchisor's trade-mark, so
it's reasonable to wonder what the return on that investment
might be. Surely franchisors know the answer, right?
Certainly, they have years of sales reports on franchisees to offer
some sort of projection for new franchisees, don't they?
Well, not so fast, prospective franchisee. Despite the
fairness and reasonableness of your query, earnings claims are not
only figures that franchisors are not required by law to disclose,
but the provision of this information may, in fact, expose
franchisors to tremendous potential liability.
Let me go on the record as saying that, where it is practical to
do so, I fully support the provision of a franchisor's
financial performance representations to prospective franchisees in
the franchise disclosure document (the disclosure document is a
prospectus-like document which franchisors are required to provide
to franchisee candidates in certain provinces before they agree to
become franchisees). I believe that organized franchisors
have verifiable data that is available and has the potential to be
material in a franchisee's investment decision. In
addition, financial disclosure of this nature may assist a
franchisee's bank with approving a loan.
But there are definitely times when the disclosure of earnings
claims is not appropriate, such as where a first-time franchisor
provides sales information for its corporate locations because
that's all of the information that is available – this
may be less than helpful for a franchisee since their sales
won't necessarily parallel the experience of the established
franchisor. Likewise, a franchisor with units in Saskatchewan
only, for example, may wish to think twice before disclosing to its
first Toronto prospect how much money can be made, given the
considerable disparities between those markets.
There are also franchisors who are quite simply not organized to
keep good enough records of franchisee performance that a
prospective franchisee can rely on that financial information.
And franchisees should always be sceptical of earnings claims
that are a bit too selective with respect to the number of years of
sales or specific locations' performance that is disclosed
– if a franchisor has 20 units, and discloses the results of
three seemingly random but profitable ones during a short time
period, they might be hiding something about the performance of the
balance of their franchise system.
Which is exactly why franchisors (both good and bad) may be
reluctant to provide financial performance information.
Whether the information is accurate and organized or not, by making
the disclosure in the first place, franchisors open up the
possibility that underperforming franchisees receiving that
information may later allege that they were misrepresented, if they
never achieved sales at that level.
For this reason, it is critical that franchisors draft (and
franchisees be aware of) proper disclaimer language that sets out
exactly what the criteria were for assembling these projections,
and fully describes the reasonable bases for any assumptions which
inform that disclosure. A projection is exactly that –
a projection. It is not a statement of fact, and any good
franchisor would never promise a franchisee that they will, without
exception, generate a certain minimum amount of revenue.
It is also why franchisors should think long and hard about
whether they have financial claims that are worth disclosing after
all of the qualifiers are inserted, and why prospective franchisees
should not view a disclosure document void of financial claims as
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).