Exposed by Not Having Earnings Claims? Then Have Salespersons Write Records

I once interviewed a spokesperson for the Franchise Trade Commission to ask what their most frequent franchisee complaint was. He told me that secret earnings claims was at the heart of most of the cases they looked into. Rupert Barkoff, a past chair of the American Bar Association’s Forum on Franchising and a recognized leader of franchise attorneys, agrees. Sadly, few franchisors provide earnings claims. To that end, Barkoff notes in a recent column, “One franchisee-oriented attorney once said to me, ‘Show me a franchise disclosure document that does not have an earnings claim, and you have shown me a lawsuit.’

Franchise buyers are no fools.

Buyers understand that before they buy a business, they better have a peg on what sort of profits to expect. The ravenous demand for such basic information is what pushes sales persons to secretly supply hints. After all, many are hungry to receive a commission for selling a franchise.

The Atlanta-based partner of law-firm Kilpatrick Stockton LLP advises franchisors what to do about this major flaw in a franchisor’s armor. He cites Australia’s Muffin Break case in which an unseasoned sales person gave oral expectations off the record on what a typical franchise could do. Like most, the franchising firm had no earnings claims and had customary wavers in their disclosure document that such outside representations were null and void. The trial judge didn't buy the disclaimers and ruled in favor of the franchise owner.

Barkoff advises franchisors on how to protect themselves:

1. Train the sales force on what can and cannot be stated to a buyer, "especially if there is no financial performance representation (FPR) in the document"
2. Keep records of meetings and telephone conversations between franchisees and all franchisor sales representatives for your protection

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