Franchisor Earnings Claims

Nobody buys a franchise without having some model or idea about how profitable the franchise will be.  Some of these models or ideas are good, some wrong, and some just dumb.

Franchisors have the ability to increase sales of franchisees by providing extensive past performance financial history by using the information that they have received over the years from their franchisees.  Such information includes: gross sales, royalty/advertising payments, lease payments in many cases, point of sales information in many cases, and sales tax in many cases.  

Franchisors have a wealth of past or historical finanical data that they could present to prospect franchisees and current franchisees via the Item 19 disclosure in their FDD.

Unfortunately, 75% of franchisors apparently don't have the necessary systems in place to present this historical data and then want to do "back of the napkin" calculations.

Worse are those franchisors who "leak" financial performance data to trade journals, then post the trade journal article with the finanical performance redacted out.  This is borderline behaviour and skirts the intent of franchisor disclosure obligations.

Sonoma Chicken provides a great example of a franchisor who a) wishes to puff up their earnings in the popular press, b) disclaim any item 19 disclosure, and c) puts the puffery piece on their website with "blacked out" earnings claims.

(I would like to thank a senior franchisor executive for this example.  Much thanks for the heads up!  Proving once again that franchisor executives, in the main, have no time for fraud.)

Here is the puff piece on Sonoma Chicken.  Here is the earnings claim.

"The fast-casual, four-unit concept generates an average unit volume of $4.5 million—a figure usually reserved for casual dining. However, Sonoma has spent the past year refining its unit economics as it gears up for franchised expansion this year." 

Now, what does Sonoma Chicken state in its item 19 claim?  Well, in 2008 they showed two stores, open since 2002 and 2004, having gross sales of $5M and $4.2M.  Two stores open since 2002 and 2004, owned an operated by the founders of Sonoma Chicken.

Is that any support from the claim that "the average unit volume is $4.5m"?  No, the puff piece in the Chain Leader about Sonoma Chicken average unit volume doesn't mention at all the item 19 claim.

Who on earth would believe that stores run by the owners, for almost 6 years on average, would have representative earnings?  Nobody.

Now, does Sonoma Chicken dare republish this "average unit volume"?  No, on their corporate webiste, they link to the Chain Leader story , but with one very important difference: they redact out all earnings claims! 

But this is not clever, it doesn't mean that they haven't made misrepresentations about earnings claims - statements which are inconsistent with their item 19 claim.  Sonoma Chicken is pratically daring people to find the original Chain Leader story with the bogus earnings claims.

Don't buy this franchise, until and unless you get a full board item 19 disclosure.