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Selling a Minnesota Franchise - Dangers
3. Setting up a Franchise Business --Selling a Franchise

Selling a franchise is not like selling a car. A franchisor and it s agents has an obligation to make accurate statements about the business that is being sold. Problems cannot be covered up or hidden and overselling must be avoided or liability can result.

Undoubtedly, the sale of any franchise usually means that the prospective purchaser has many questions about the businesses viability. This usually includes performing Due Diligence by the buyer and seeking documentation and assurances about the franchise opportunity they are considering. The danger is that the franchise seller will try to seal the deal by making assertions related to the business and its potential earnings. This often results in franchise seller overstating earnings potential. This is not allowed by franchise regulatory law and is often the basis for franchise litigation claims.

The danger is great since the UFOC Guidelines do not clearly define what an earnings statement may be. Even the most innocuous statements may be considered an earning claim for which a franchisor may be subjected to liability. Even the following:

  • “Our stores generally produce a 7% return on your investment within two years."
  • “Gross profits may be expected exceed 25% of your sales."
  • ’We have never had a store produce less than a $50,000 a year profit."
  • “You should be able to break within the first two years.”
  • "The numbers you are considering sound realistic to me."

Because of this potential liability, it is important that in selling a franchise, the franchisor and its agents should avoid advertisements, promotional literature or statements that are communicated to potential buyers regarding the earning potential of the new franchise.

If earnings statements are made, they must be based on a supported earnings claim. In other words, the representations must have a reasonable basis in fact. That may mean providing documentation in the form of average gross sales for the existing locations in the system and/or profit and loss statements. Any financial statements provided to a prospective franchise buyer should be include with supporting documentation in the Uniform Franchise Offering Circular (UFOC).

Any earnings statement must be based on other similarly situated franchise units. They must be reasonably similar with regard to the size and nature of the store being sold. The earnings statement must also reflect the current financial production. In other words the documentation should be based on production in a proximate time period and not based on production that predate the proposed purchase by a number of years.

Franchisors should work with their attorneys to avoid potential liabilities resulting from sale. This would include:

  • establishing written policies requiring that any claims or representations pertaining to earnings, sales or profits be in writing and limited to the UFOC;
  • compiling, reviewing and including recent records to substantiate any earnings claims;
  • establish procedures to update UFOC earnings statements periodically but no less than annually;
  • establishing training regimens for sales personnel and company employees.

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