Franchise Evaluation Tips from Mr. Franchise
This is a GREAT website with lots of useful information I haven't found anywhere else. Read the "Franchise Articles II" tab. It has a business reality checklist for evaluating any franchise investment. Below this is an informative article about how Mr. Franchise, Kevin B. Murphy, a franchise attorney, bought his first franchise in 2002 (in the home improvement industry), and his first-hand experiences in starting the franchise from scratch, then re-selling it a year later.
Murphy v Illinois
Patricia;
How would you compare Murphy's list to the AG of Illinois's list?
Michael Webster PhD LLB
Franchise News
Mr. Franchise's Tips vs. Illinois Attorney General's Tips
Hey, thanks for sharing that link to the IL attorney general list. It's good, but could be even better. Here's my take on it:
The Illinois Attorney General’s office has a basically good, very lengthy document. But it looks at things from more of a legalistic and not a practical business standpoint. For example, they never discuss the importance of hitting the breakeven point. In fact, this isn’t even on their list of questions to ask franchise owners. Instead, they make a rather incredible statement at the beginning “you may experience many months when you pay out more than you take in.” What? It’s usually years, not months, and if you don’t have enough money to reach the breakeven point, the entire business goes down the drain. That's the kind of practical business advice that's needed.
Another example: when it comes to asking the fundamental financial question to ask franchise owners (the profit of the business), the question listed by the IL attorney general isn’t even a good one “Do your royalty and advertising fees leave you enough profit for yourself.” That’s too vague to be of any use. As Mr. Franchise points out, many franchise owners work long hours and operate at or below minimum wage financial performance, yet think they are "profitable" and "successful." Much better questions to ask: (1) how much money did it take (total investment) to get your business operational; (2) when did you hit the breakeven point; (3) how many hours a week do you work in the business; and (4) what’s your pre-tax net income from the business?
I could go on. Bottom line: government officials (as well as most advisers in the private sector) don’t have experience in the dynamics of starting and operating a franchise business. That’s what the government list suffers from. It’s good as far as it goes (mainly legal), but it doesn’t go far enough into the critical business issues to consider and questions to ask. If you followed everything they recommend about terms of the franchise agreement, renewal, training, trademark rights, protected territories, termination and resale provisions, etc., etc. but end up buying a franchise that's not going to make any decent money if it ever hits a distant breakeven point, how has all that other technical-legal advice helped?
Patricia on Business Advice
Patricia wrote below: " In fact, this isn’t even on their list of questions to ask franchise owners. Instead, they make a rather incredible statement at the beginning “you may experience many months when you pay out more than you take in.” What? It’s usually years, not months, and if you don’t have enough money to reach the breakeven point, the entire business goes down the drain. That's the kind of practical business advice that's needed."
I agree that this is the type of practical advice that prospective franchisees want.
But it is quite unlikely that a prospective franchisee will get this information from the UFOC, and if they get it from another source, while that information may be true, the prospect cannot legally rely on it - meaning that if it is false, they are likely barred from suing for misrepresentation.
1. Earnings Claims: From the UFOC Guide on Item 19, An earnings claim is defined as "any information from which a specific level or range of actual or potential sales, costs, income or profit from franchised or non-franchised units may be easily ascertained."
Clearly, any information which allows you to easily calculate the break even point will allow you to calculate a specific level of actual or potential sales.
Earnings claims have to be disclosed in item 19, and only item 19.
Even if a franchisor makes an item 19 disclosure, would you expect information detailed enough to determine what your break-even period would be?
No - much of what determines individual performance is not knowledge that the franchisor has or could be reasonably held to know.
The Law Firm Fisher Zucker has a very nice article on earnings claims.
2. Start-up Costs and Item 7 Disclosure
While you cannot get break-even figures for your location, you arguably entitled to location specific information about your start-up costs via item 7.
Again from the NASAA guidelines,
>ii. Disclose payments required by the franchise agreement and all costs necessary to begin operation of the franchise and operate the franchise during the initial phase of the business. A reasonable time for the initial phase of the business is at least 3 months or a reasonable period for the industry. Include an entry titled "additional funds" and disclose the length of the initial phase in the entry. Note that you will provided with information for 3 months or a reasonable period for the industry - but most franchisors simply ignore the second option and give you data for 3 months.
3. Integration clause and Material Information Not Found in UFOC.
Franchise contracts have "four corners" clauses which aslo state that the franchisee has not relied upon any representation outside the contract.
In practice, what this means is that even if you found information which was useful but did not have to be disclosed in the UFOC, you might find it very hard to maintain an action from misrepresentation if you found that information to be false.
This is different from the situation in which a UFOC representation is later found out to be false. In that case, you would have to look to your local state laws, the so-called little FTC Acts, because there is no private cause of action for a violation of the FTC Franchise Rule - an absence which makes no sense.
Michael Webster PhD LLB
Franchise News
Right On! Patricia!
It is knowing what questions to ask. When state government offers a list of questions that franchisees should ask references that are provided by the franchisor in the UFOC and presumes that franchises break even, this in itself can be misleading to new prospects. Think about how unfair it is to new prospects that they have to ask ex-franchisees and current franchisees these questions when the actual statistics concerning the profits and losses on average of the indvidual units within the franchise network are known to the franchisor ----who isn't required to disclose these statistics under disclosure laws, the Rule and the UFOC/FDD. Because franchisors are allowed to sell their franchises without disclosing the risk of failure, as demonstrated by past and present performance statistics of their individual units, lots of duds are sold to the public and they, like you indicate, "end up buying a franchise that's not going to make any decent money if it ever hits a distant breakeven point" and "how has all that other technical-legal advice helped?" The UFOCs (soon to be the FDD's) act to obscure the actual risk of the investment from the new buyer.DD Tips
Patricia wrote" "In fact, this isn’t even on their list of questions to ask franchise owners. Instead, they make a rather incredible statement at the beginning “you may experience many months when you pay out more than you take in.” What? It’s usually years, not months, and if you don’t have enough money to reach the breakeven point, the entire business goes down the drain. That's the kind of practical business advice that's needed."
Uh, many months is not years? Ok. Odd, but Ok.
You need to be told that if you cannot afford the monthly burn, you may lose your investment?
I think that you have underestimated how much the legal issues effect the return on investment.
My own view is the the Illinois Checklist is one of the best free franchise due diligence checklists out there - if you really follow the checklist. Almost worth $1,000.
Michael Webster PhD LLB
Franchise News
Mandatory Earnings Claims
You've made some valid points. I've read a couple articles by franchise experts who say franchise companies should not be allowed to hide behind current franchise regulations that allow earnings claims to be optional. Since the franchise companies have very detailed financial information on both franchised and company-owned outlets, they should be required to disclose what they know about financial performance.
You'd think this kind of disclosure would be required by now. I mean, it's the major reason someone buys a franchise and they're forced, in the majority of cases, to make this decision based on incomplete information, or "puffing" by franchise owners.
Common Sense - M. Webster PhD LLB
You wrote "Uh, many months is not years?" Duh, that's right, many months is NOT years. Many months can be 3, 5, 7, even 9. If they were referring to a possible time span any more than 12 months, they'd call it a year or years. So a reference to many months is not commonly understood as years. It's not "odd", as you say. It's just common sense. And yes, the "monthly burn" as you call it is not disclosed in FOC's, and should be. If someone follows the IL Checklist, but doesn't look into the issues raised by Patricia, their investment can, and likely will be lost. So although you think the IL Checklist is almost worth $1,000 - it's actually worthless in this sense. Again common sense. Are you an actual practicing attorney, or just one of many wannabees with a law degree after their name? Given what you've written here, I'd have serious reservations about consulting with you on franchising. You need a serious dose of .... common sense.months vs. years.
later this year i'll be 468 months old. hurray for me. does that sound odd to you Michael? it should... the connotation of using the word 'months' vs. using the word 'years' is entirely different.Horse Pucky...
You assume that franchisors have detailed an accurate Profit and Loss Statements for franchised locations, but do you know it as fact.
I think personally that earnings claims are good idea and franchise buyers in the US can buy one of the 15-17% of franchise concepts that make them.
Mandatory Earnings Claims are unlikely in the near term and possibly the long term.
The Truth Shall Set You Free!
TIF
Common Sense and Franchise Law
Guest wrote: "And yes, the "monthly burn" as you call it is not disclosed in FOC's, and should be."
It would be an earnings claim -and if not disclosed in item 19, then it is illegal. And as far as I aware, there are no item 19 disclosures of this nature.
As to looking outside the UFOC for evidence of this type, beware because you cannot legally rely upon it: if material, it has to be in the UFOC.
Guest wrote: "If someone follows the IL Checklist, but doesn't look into the issues raised by Patricia, their investment can, and likely will be lost. So although you think the IL Checklist is almost worth $1,000 - it's actually worthless in this sense. Again common sense."
If you read item 8 carefully enough, with some thought and lots of franchise experience, you will be able to estimate some of what Patricia wants. That isn't common sense, it is however the result of a a lot of franchise experience.
Guest wrote: "Given what you've written here, I'd have serious reservations about consulting with you on franchising. You need a serious dose of .... common sense.."
And it would not be productive for me to have you as a client: you know too little about franchising for it to be worth my expensive retainer to you.
But I encourage you to read some more here and elsewhere.
Michael Webster PhD LLB
Franchise News
Seriously
Calm down. You're wasting your time arguing about time. Get over it. Give him a break if he misspoke or didn't clarify exactly to your liking. His name is Michael, not Jesus.TOO BAD..
that this bozo won't say who he is. The thought occurred to me that he could be SpuddiePie's lawyer. SpuddiePie said he had some real big time whiz bang lawyers on retainer all the time just in case anyone dared challenge his right to exclude others from using words that he might like to incorporate into his own name, and other such whoopdee doo important business interests. Don't you think this guy sounds like the kind of guy who would appeal greatly to SpuddiePie?
I bet he's a big Mike Huckabee supporter. --
Richard Solomon, FranchiseRemedies.com, has 44 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
TIF is Right --Franchisors will fight mandatory earnings
Unfortunately, unless the Congress is educated to the dark side of franchising, the franchisors will be successful in preventing mandatory earnings claims. The current UFOC (soon to be the FDD) permits franchisors to sell franchises with inadequate and ineffective disclosure upon which franchisees cannot do effective and meaningful due diligence on the odds of success or failure of their investment. This explains why there are so many duds out there and why the duds can continue to sell their franchises to the unsuspecting public while being subsidized by the Small Business Administration (the SBA). Unfortunately, there aren't enough attorneys like Richard Solomon, Paul Steinberg, and Michael Webster (all of whom share with us on this site) who can prevent franchisees from swimming in the "horse pucky" of government regulation of franchising.Detailed P/L Claims
TIF wrote: "You assume that franchisors have detailed an accurate Profit and Loss Statements for franchised locations, but do you know it as fact."
The information that should be presented has nothing to do with earnings, in my opinion.
The franchisor has detailed gross sales, royalties, advertising and other expense reports from the franchisee.
This historical data should be presented in item 19 to the franchisee, along with store specific information if available.
The franchisor would benefit from presenting this detailed information because it would provide a nice counter balance to the salesman's blandishments.
Fewer and not more lawsuits would result from this type of item 19 disclosure: past historical data and not forecasts.
Michael Webster PhD LLB
Franchise News
Webster - Attorney or Wannabee?
Well, I guess you admit your mistake that many months do not translate into years. Like I said, it's just common sense. It's incredible you're still clinging to the IL Checklist, but now say "with some thought and lots of franchise experience you will be able to estimate some of what Patricia wants." "ESTIMATE" "SOME" of what Patricia wants? And only after lots of franchise experience? Give me a break. A checklist is supposed to help people who don't have lots of franchise experience. Duh? Saying I know too little about franchising to be your client, when you know absolutely zip about me or my background says volumes about your common sense. Besides, isn't that why someone would supposedly retain you - because they don't know enough and want to learn about franchising? And, you've conveniently ignored my question about you, so I repeat it: Are you a practicing attorney or just a wannabee with a law degree after your name?Item 20 Ranter - you can write the earnings claim standard
Be my guest Item 20 Ranter and write the standards for mandatory earnings claims and propose them to Steven Topperoff, staff attorney in the Division of Marketing Practices, Bureau of Consumer Protection at the Federal Trade Commission instead of your incessant bitching and moaning.
The Truth Shall Set You Free!
TIF
Gross sales / DD
Always a good idea to get the reports directly from the franchisor. Another is to check the raw materials (many zors require purchases from specific suppliers) invoices to see if the Cost of Goods Sold makes sense.
Most of the big franchisors have fairly good records as to gross numbers, but you'd be surprised how many purchasers don't bother getting permission from the seller to obtain reports directly from the zor.
Webster seems franchising competent and knowledgeable
Evidenced by his frequent posts on BMM.
The guest on the other hand can't even come out of the shadows and register anonymously. Your two attributed posts tell me you think you know more than you actually do about franchising!
The Truth Shall Set You Free!
TIF
Common Sense and Hyperlinks
CLICK ON LICK BELOW, IF NOT A DOG
Franchise News
Re: Webster - Attorney or Wannabee?
Wow, just checked in before going to a company New Years' party and it seems people are talking about issues raised in my post. That's great!
I think the "Guest" (whoever he or she is) made some valid points that deserve a response or comment, not just ignored or written off because they're not a registered user. Why attack someone based on clairvoyance or assumptions ("you know too little about franchising")? Let's not sink to that level.
Happy New Years to All! See you in 2008.Bingo on Item 19
Michael,
You are spot on!
One of the biggest mistakes the FTC made when they wrote the rule in 1978, was to call Item #19 "Earnings Claim", they have finally corrected their ways, it only took them 30 years. In the updated franchise rule Item #19 is called "Financial Performance Representations".
Most franchisors do not track unit profitability. There are many reasons why this is the case.
Every franchisor tracks gross sales because of royalties or if they are a product oriented franchise, they track purchases by the franchiisees.
The franchisor representation of historic gross sales is a very useful for prospective franchisees. It gives them an understanding of estimated gross sales and allows them to build a proforma based on historical sales data.
The more that sales data is segemented by years in business, geographic areas, or types of locations, the more beneficial the disclosure is.
I personally support the concept of mandatory disclosure of "Financial Performance Representations".
Jim Coen
877-469-3002
Blog: Lets Talk Franchising
Jim Coen is the Executive Director of the New England Franchise Association
Gross Sales ---Unit Performance Report --FranData
Do you think that the new Unit Performance Report that FranData introduced recently will result in any more information being made available to potential franchisees. FranData knows, of course, that the franchisors have this information available on which to make this kind of report that would help the franchisor and the franchisee, but will it make any difference if franchisors don't volunteer the information? You know, of course, that I believe FranData is putting misleading information out there in Snapshots and Risk Profiles when they don't acknowledge and research the failures obscured in Item 20. Also, if FranData tracks defaults of franchise loan guarantees, do they track the defaults of the franchisor SBA guaranteed loans to help their preferred lenders?Dogs on the Internet and Scholarly Works are Hidden
I love it, Michael. Obviously, this new poster doesn't understand how much integrity you have. I have always counted on you for truth in your statements. Would you discuss whether or not Item 19 mandated disclosure would result in competition between franchisors of the same or similar concepts? When there is no Item 19 disclosure and Item 20 is misleading and imprecise, this is a disservice to the franwads that don't do their due diligence and there is no competition between franchisors of sandwiches or postal-shipping, etc.. It is just a matter of who gets to the potential franchisee first and/or who has the most famous brand name, etc... Also, do you think there is any chance of getting Paul Steinberg's "Beguiling Heresy" posted somewhere on the Internet in 2008. This study concerning "Regulating the Franchise Relationship" is excellent and scholarly and provides sources and citations and an overview that would complement the information already on the Blue Mau Mau Site. I understand the Copywrite belongs to Penn. State but wouldn't they agree to publishing this very excellent and needed study on the Internet. Happy New Year, Michael, to you and your family.Ontario Regulations
The Ontario Regulations still make this mistake, and the Ontario Bar Association's proposed revisions don't propose changing it.
Michael Webster PhD LLB
Franchise News
Why don't you call Darrell @ FranData and ask him?
You guess and assume; why don't you do a little research before you put your foot in your mouth?Mandated Item 19 Claims
Guest asks: "Would you discuss whether or not Item 19 mandated disclosure would result in competition between franchisors of the same or similar concepts? When there is no Item 19 disclosure and Item 20 is misleading and imprecise, this is a disservice to the franwads that don't do their due diligence and there is no competition between franchisors of sandwiches or postal-shipping, etc.. It is just a matter of who gets to the potential franchisee first and/or who has the most famous brand name, etc..."
If I am reputable franchisor, with any sense of financial history, I dread the day when some bogus franchisor ends up in jail for making illegal earnings claims - a repeat offender in all likelihood.
What will happen then is that the FTC will, in order to increase its influence -in part, likely mandate earnings claims. It is very likely that this regulatory cost will be large.
So why wait for the inevitable? Disclose all meaningful data that you have about past performance and make the usual disclaimer about the past not predicting the future.
Michael Webster PhD LLB
Franchise News
Beguiling Heresy
Guest asks: "Also, do you think there is any chance of getting Paul Steinberg's "Beguiling Heresy" posted somewhere on the Internet in 2008.
This study concerning "Regulating the Franchise Relationship" is excellent and scholarly and provides sources and citations and an overview that would complement the information already on the Blue Mau Mau Site."
In fact, Paul and I are moving ahead with that very project. I am scouting out some technical resources, but we hope to have the entire law journal article up on a multi-author blog very shortly.
There are one or two technical questions I would like to work out, but you should see an announcement here fairly soon.
Thank-you for the kind wishes.
Michael Webster PhD LLB
Franchise News
Thoughts on the Michael Webster vs. IL Checklist Controversy
As a new visitor and attorney myself, I don't think the new poster is attacking anyone's integrity - just the credibility of statements made. Webster said many months = years, which as the poster points out is obviously not correct. The attorney should admit his mistake and move on. The poster noted Webster back-pedaled substantially from his original plug of the IL checklist, which Webster now says is only good if you have lots of franchise experience and are willing to hire him for legal advice. Question: how could a Canadian attorney, not licensed to practice law in the U.S., ever do this legally for a U.S. resident? I'm not a franchise attorney, but know franchise companies already provide a working capital component in Item 7 (known as additional funds). I don't understand how requiring franchise companies to include an estimate of sufficient additional funds (working capital) to reach break even constitutes an earnings claim, as Mr. Webster asserts. Finally, his personal attack on the poster as someone else pointed out ("you know too little about franchising") without knowing anything about the poster's background or qualifications is very unprofessional for any attorney. I can only hope Mr. Webster does not carry this attitude into his legal practice or his clients will suffer. As the poster pointed out (and Mr. Webster conveniently ignores), that's the purpose of hiring any professional - to access their comparatively superior knowledge about a subject or field.Beguiling Heresy a New Year's Gift to the Internet and Truth
Thanks, Michael, for this very good news that will help lay people like myself to understand more about the inner workings of rhe franchise relationship and the need for more effective regulation or some process like the AAFD Seal to drive out the predator franchisors who sell those dogs to the public --and then treat their franchisees like dogs. The FTC Rule has declared Open Season on the Internet to recruit the naive and inexperienced Marks to provide that cheap labor and capital to prove the all those "unproven plans" that are being offered and sold with immunity and impunity under our laws. My education on Blue Mau Mau and this study "Beguiling Heresy" may qualify me to work for a Master's Degree in the art of agitating for better regulation of franchising.At least Webster is out in the open and not cloaked as a guest!
Webster's advocacy for personal responsibility for effective due diligence for prospective franchisees is evidenced by his posting history.
Regarding Item 7 working capital estimate; the minimum stated is for 3 months. A franchisor can list a higher number if they choose, but it cannot be characterized as the amount of working capital to achieve break-even or a cashflow positive run rate since that could be construed as an earnings claim which would need to be included in Item 19 of the UFOC/FDD.
Why don't you give up your guest status and register anonymously so we can discern your posts from those of other guests? We wouldn't want to confuse you with the Item 20 Ranter.
The Truth Shall Set You Free!
TIF
Now Hold On Just A Minute Here
Webster aint as bad as you make out. Consider some of your points in the following light:
An American can hire any lawyer anywhere he likes. He can hire a Canadian lawyer to help him with franchise issues, no matter when they may all be located. Mike aint holding himself out to be a USA licensed lawyer, so he's not in violation of any laws or rules whatsoever.
"Additional funds" equals working capitall, and that has to include sufficient money to attain positive income - so that statement of what is required is certainly an earnings claim, no matter how you slice it. Telling someone how long it will take/how much it will take to get to positive financial results of operations is aboslutely an earnings claim. Just telling somebody that his conclusions stated in his business plan that he shows you are reasonable estimates in the context of that franchise is also an earnings claim. Your definition of earnings claim is much narrower that what earnings claim really includes.
Webster is correct in aiding the folks in here by pointing out when a poster is out of his depth. That's what we want the really esperienced guys and gals in here to help out with - identifying the bozos.
If you think he's unprofessional, you ought to spend some more time around me. I make Webster pass for a real gentleman.--
Richard Solomon, FranchiseRemedies.com, has 44 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
Guest Attorney on Earnings Claims
Guest attorney wrote: "I'm not a franchise attorney, but know franchise companies already provide a working capital component in Item 7 (known as additional funds). I don't understand how requiring franchise companies to include an estimate of sufficient additional funds (working capital) to reach break even constitutes an earnings claim, as Mr. Webster asserts."
You are correct that you do not understand, neither did Patricia or Guest.
But is important to understand what an earnings claims is, what an illegal earnings claim is.
You could have read the recent case by Mario Herman on this site.
You could also look it up: earnings claims ufoc
The fact that you don't know this basic fact about franchising is not surprising - most individuals and attorney's don't. The fact that you didn't take the time to do a little research on the subject is more troublesome.
Guest Attorney wrote: "Finally, his personal attack on the poster as someone else pointed out ("you know too little about franchising") without knowing anything about the poster's background or qualifications is very unprofessional for any attorney."
It is not a personal attack to demonstrate that a guest poster does not understand the subject, viz. what an illegal earnings claim is.
The guest poster demonstrated lack of knowledge about a critical area -this demonstrates "you know too little about franchising."
Guest Attorney wrote: "that's the purpose of hiring any professional - to access their comparatively superior knowledge about a subject or field."
The guest poster would not have benefited from my superior knowledge.
I have turned away a number of prospective franchisees who only wanted me to bless their transaction - which I thought was a pile of crap.
For clarity, I still believe that the Illinois Checklist is a wonderful tool. Please read my entire posts.
Michael Webster PhD LLB
Franchise News
"dat Barrister"
It was thus proclaimed:
Webster said many months = years, which as the poster points out is obviously not correct. The attorney should admit his mistake and move on.
My reply:
I am not aware that it is a mistake. Many months translates to me like it would other southern folks as being indeterminate in the same vein as "many moons", which may mean months to decades...
Secondly going after Webster "taint" such a good idea. Take a "poke" "iround" "that there" Internet and you might notice he is one of the most prolific and helpful "gents" out there. And I mean "gent", the "boy is "plum'" "cor-gee-all".
Now "ya" go after that degenerate "Solomon" or that "Fuwa" and they get what they deserve "'cause" both of them are "arses" and poison mean, but that Webster, he is likable "fella" that tends to elevate the general tone of a “convey-sation”.
Could be that a dull, slow-witted, type such as myself is just all infatuated "up-naw" with "them there" fancy "die-greez" and "cree-dent-Ealls" "da" boy possess, but we like our Barrister here, like him fine. "Ya'll" might be well served to sit back a spell and observe the tracks by the man; I figure I "git" me a free "ed-U-ation" this way, ya'll might too.
FuwaFuwaUsagi
"Never underestimate the power of stupid people in large numbers."
A good object lesson here..
about why being an attorney is insufficient information to qualify you to accept clients for franchise investment vetting.
What this person doesn't know, from his own words in here, but is willing to criticise folks about, is the most dramatic depiction of who he really is.
From the tone of his post, I might chance a guess that he could be some in-house mediocrity working for some franchise company. That would also explain his laying behind the log about his identity.
It must be bloody awful to be so afraid of one's insufficiencies that even one's name can't be disclosed. --
Richard Solomon, FranchiseRemedies.com, has 44 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
Fairness to Guest, Guest Attorney and Patricia
To be fair to Guest, Guest Attorney and Patricia, I should have focussed the discussion right away on the possibility of an illegal earnings claim, the 3 month requirement in item 7, and why franchisors cannot provide individual break-even projections even in the item 19 disclosure.
The thread has gotten sidetracked, which is partly my fault.
Michael Webster PhD LLB
Franchise News
Question for Michael on Earnings Claims
Michael - I like your posts and think they're very informative. But aren't you going off the deep end on the earnings claim here. If a UFOC, Item 7, under additional funds currently says "$45,000 covers your first 90 days of operations" and the only change is it is revised to say "$180,000 covers 12 months of operations up to your breakeven point", how is this an earnings claim?Item 20 Ranter Paranoia
Talk about people operating in the dark, your franchise broker website neglects to give any info about you, other than a short sentence about being "an executive who works for a franchise company" (presumably yours). Why don't you follow your own tag line and provide truth about your real background. You must have a real hard on for the Item 20 ranter. You constantly bring him/her up, suspecting everyone of being this person. Relax, take some deep breaths, and if your hard on doesn't go away in three hours, see a doctor.Additional funds
The commentary to 436.5(g), as amended, suggests that the FTC found arguments that interpreting "additional funds" as working capital until a break-even point was established was analagous to a back-door mandatory earnings claim, a position contrary to the FTC's position that earnings claims, or "Financial Performance Representations," should be voluntary. Thus the amended rule elimates any implication that the FTC intends for zors to disclose either working capital or a breakeven point as this goes beyond what the disclosure documents require, and could be misleading absent additional disclosure about earnings, which again, the FTC does not require.
That being said, the fear that most zors have of earnings claim is unreasonable, as succesful units is undoubtedly a major selling point for their system. The only really marginally persuasive arguments against including an Item 19 is that (1) there may be substantial costs associated with compiling the store sales for all the system units; or (2) store sales suck. As for the first point, assuming the system is viable, any costs (which I cannot even understand why they would be substantial as the zor is likely getting sales reports to calculate royalties and other monthly mandated payments - also, the amended rule eliminates requirements that the claims comply with GAAP as well) could be absorbed by future franchise sales as a result of the positive marketing. It would be a business expense.
As to Mr. Webster, from his postings, here and elsewhere, it is readily apparent that he is both knowledgeable and professional. Plus, he has the decency to resist littering his posts with "aboot" and "eh" in every sentence - the fact that he shoulders this uniquely Canadian hardship with nary a complaint goes to his impeccable character. Jolly good of him I say.
Earnings Claims
I don't think so, as I elaborated above.
But perhaps you could refine your question, referencing both the item 7 and 19 UFOC Guidelines.
Michael Webster PhD LLB
Franchise News
Truth in Franchising is a generic avatar
I am not affiliated with the website of this same name and don't know who the owner is either.
The Truth Shall Set You Free!
TIF
David Holmes on Working Capital
Originally, the FTC had thought to included the phrase "working capital" in the new item 7.
David Holmes convinced the FTC Staff to delete this as it would lead to making an earnings claim. See page 127.
Michael Webster PhD LLB
Franchise News
Earnings Claim Question for Michael Webster
I don't understand your reluctance Michael, so let me try it again: Under the UFOC Guidelines for either Item 7 or 19, how could a UFOC, Item 7 disclosure, made under additional funds, that currently says "$45,000 covers your first 90 days of operations" ever be considered an earnings claim if it was modified to read "$180,000 covers 12 months of operations up to your approximate breakeven point."No reluctance at all
There is no reluctance here; in fact I just gave the reference to David Holmes' comment to the FTC which convinced them to remove the words "break even" from the item 7 Disclosure in the new FTC Rule.
I think that David is right. But, why don't you read his comments and then clarify your question. David and I might be both wrong.
David Holmes, I believe, has over 30 years of representing franchisors.
But again, I urge you to read the FTC staff report, search for "Holmes" and if you are still unconvinced by David's explanation, explain why you don't think David is right.
Michael Webster PhD LLB
Franchise News
Earnings Claim Question - Michael or Anyone?
I'm not saying anyone is "right" or "wrong." I'm just asking a question, as a lay person. I do know something about finance and giving info about the bottom half of financial performance (expenses) is not giving any information about the top half (income). I read David's comment about working capital being a back door earnings claim, but he didn't explain how that could ever work. How can anyone back door income, if all they have are expenses? And you need both to deduce earnings. For the third time, why is giving out expense information, which is already done in Item 7's additonal funds for 90 days any different when is done for a longer period (break even)? How could this ever rise to be an earnings claim?What is a Franchise Earnings Claim?
Guest wrote: " I do know something about finance and giving info about the bottom half of financial performance (expenses) is not giving any information about the top half (income)."
1. Have you actually looked at the Item 19 definition of earnings claim? Or are you relying upon your knowledge of finance?
2. Did you read the article I cited above?
The critical issue was whether an item 7 disclosure could be called "breakeven".
Holmes explained why not. The item 7 disclosure could be for more than months, but whatever length of time it is for, it cannot be called a break even point.
If you were told that in five months, you would break even, then this would tell what gross sales you could expect: which in the strange world of franchising, is an earnings claim by definition.
Michael Webster PhD LLB
Franchise News
Simple Test For Michael
So, let's test your statement. You said "If you were told that in five months, you would break even, then this would tell what gross sales you could expect" It takes five months and $90,000 to reach break even. What are my gross sales?Two Answers - One Earnings Claim
I don't think you have well defined problem, but I will attempt to answer it.
1. If you mean that you have invested $90,000 and have recouped it in 5 months, then we know what minimally must have grossed: greater than 90k/5.
2. If you mean, on the other hand, that after 5 months, you have grossed $90,000, and expenses now equal revenues, then we also know your gross sales: 90k/5.
I am sure that you could mean other things, also.
In either of the two cases, an Item 19 claim has been made - you could look it up.
Michael Webster PhD LLB
Franchise News
Doesn't matter...still an earnings claim
Guest quote -
"It takes five months and $90,000 to reach break even."
This statement alone would be an earnings claim.
The Truth Shall Set You Free!
TIF
TIF - Short and Sweet
I wish I said that!
Michael Webster PhD LLB
Franchise News
Are you an attorney?
Are you a franchise attorney? If not, you're not qualified to answer.