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Franchise Advice


n the course of carrying out their research, a prospective franchisee is likely, and understandably so, to rely on the franchisor for information. The franchisor, naturally, is trying to encourage prospective franchisees to join its system and might therefore paint a rosy picture – so prospective franchisees are well advised to carry out their own checks, if only to arm themselves with enough evidence to provide reassurance. A franchisor should provide a full list of franchisees and not just the top-performers that the franchisor wants you to talk to. Prospective investors need to speak to as many existing franchisees as they can to see if they back up the franchisor’s rosy picture. Undoubtedly, the big questions for a


prospective franchisee are financial because they will need to know: • How much will it cost to start the franchise business?


• How much money can be made? • When will the business be in profit?


Franchisors may understandably be reticent about giving a full disclosure of this information. If a new franchisee does not then achieve the figures provided by the franchisor and the figures were not based on the average performance of franchisees, then the franchisor is exposed to a misrepresentation claim. As a result franchisors may have a tendency towards disclosing limited or edited information and also providing such information with disclaimers and warnings. Though likely to provide financial information


50 | Businessfranchise.com | June 2012


Financial truth I


James Barrett discusses what financial information prospective franchisees should ask to see


with a disclaimer or caveat attached (plus there may be a clause in the franchise agreement to the effect that a franchisee has not relied solely on information that the franchisor has provided to guarantee the success of their business) franchisors cannot pluck figures out of thin air. In other words any figures that are provided about start-up costs, turnover, margins and cashflow have to be based on the performance of franchisees as a whole and not the top five or 10 per cent, and thus should, in any case, reflect an accurate picture in general.


“Franchisors cannot pluck figures out of thin air”


What this means is that future franchisees, when they receive financial information, need to ask the franchisor on what basis the figures have been prepared and the franchisor’s response should be recorded in writing. You would expect the franchisor to confirm that the figures are based on the average performance of its franchisees although, in the case of new franchisors, they will not have actual performance figures on which to base their forecasts and so it may be informed guesswork, which is not necessarily unreliable. However, when considering a franchise opportunity with a franchisor that has no or very few franchisees, prospective franchisees need to ask the franchisor to confirm on what


evidence their calculations have been made and how the figures were reached. Once a franchisor supplies this information it is then a prospective franchisee’s job, and that of their professional advisors, to consider those figures in light of their own particular circumstances. One franchisee may have a particularly good territory or location, or may be experienced in the area covered by the franchise and have existing customers. Another may only want to work part-time or has no prior business experience. All of these factors will affect a future franchisee’s ability to achieve the standard figures provided by the franchisor. If you are buying an existing franchise business then, of course, you should receive the actual financial performance figures for that business from the franchisee who is selling it. Those figures should be warranted in the sale agreement, which means that the selling franchisee guarantees that they are accurate. The guarantee relates to historic figures and does not guarantee that they will be achieved going forward. In summary, franchisors need to be able


to provide answers to the three core financial questions above and also clarify that data, whilst the prospective franchisee needs to interpret the figures bearing their particular situation and business plans in mind. n


James Barrett


James Barrett is a solicitor at Hamilton Pratt Business and Franchise Solicitors


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