3. Setting up a Franchise Business --Selling a
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."
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.”
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.
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.
work with their attorneys to avoid potential liabilities resulting from
sale. This would include:
written policies requiring that any claims or representations
pertaining to earnings, sales or profits be in writing and limited
to the UFOC;
reviewing and including recent records to substantiate any earnings
procedures to update UFOC earnings statements periodically but no
less than annually;
establishing training regimens for
and company employees.
For Assistance on your Franchise Issues