International Law

Why Don't Franchises Don't Reveal Earnings Power

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Darrell Johnson, writing at Frandata, has a great post on earnings claims.

An argument used by some franchisors ("We're not allowed to make such representations.") goes away.

"More than 700 brands, or approximately one fourth of all active franchise brands, make FPRs [financial performance representations] today, and that number is steadily growing. It remains to be seen whether there will be a rush or a continuing methodical expansion of franchisors making such representations.

Other arguments franchisors often give for not making such disclosures generally are along the following lines:

"We just don't collect such data." How does it look to prospective franchisees that a franchisor doesn't collect such data? Keep in mind that half of all franchised units are in the control of experienced multi-unit operators. Two very reasonable conclusions candidates could make are that (1) the franchisor doesn't have very good systems in place, or (2) that they don't have very good data. Neither is a very good reflection on the franchisor.

"We don't have enough units to develop useful FPRs." Could a prospective franchisee conclude that it's too early to consider a brand that hasn't developed enough company or franchise units from which to make a reasonable assessment of their performance?

"Collecting such data would not be meaningful in our system." The implication to be drawn here then is that this franchise system is so complex or so scattered or so somethingthat the franchisor can't make sense of what the units are doing. That's not exactly a good starting point for a prospective franchisee either."

A franchisor has to collect weekly sales reports in order to calculate royalties. Many franchise systems lease the premises to the franchise, and sell the franchise the vast majority of their goods, supplies and inventory.

So, it is utter nonsense to say that the franchisor could not aggregate this information in a meaningful way.

A good franchisor will realize that the usual franchisee will have unduly high financial expectations and will use a detailed financial performance reports to tamp down these unrealistic expectations.

Full post as published by Misleading Advertising Law on September 26, 2008 (boomark / email).