Franchise Buying Guide

Franchise Roadblocks

Situation No. 2
Presented by Guidant Financial
Guidant Financial specializes in helping entrepreneurs purchase new franchises using their retirement funds.

Improper Earnings Claims
In franchising, with limited exceptions, the only way a franchisor can legally provide you with information about what you can expect to make as a franchisee is to provide that information in writing and include it in the UFOC in Item 19. In this particular franchise, the franchisor had not included earnings claims. During the sales process, the prospective franchisees were informed inadvertently by the franchise salesperson that the average location has a certain level of sales once it reached maturity. The salesman immediately realized his error and told the franchisees he should not have given out that information and asked them not to let anyone know, because that type of slip would cost him his job.

At the closing, the franchise salesperson gave them a lengthy document to sign. The pages were in the form of a questionnaire and dealt with the franchise sales process. Asking a franchisee to sign such a document at the closing is routine, ensuring the franchisor didn't break the rules as they recruited the prospect and also that the franchisee provided honest answers during the selling process. This questionnaire asked the franchisees to state they had not received any information on unit performance, and, if they did, that they would not rely upon the information. While they wanted the franchise, they actually had relied upon the information in making their decision. They didn't want to sign anything that was untrue and refused to sign, then called us and asked us what to do.

Had they followed the advice in the book, they would be working with a qualified franchise lawyer and would have dealt with the matter long before they got to the point of signing the franchise agreement. Since I knew the franchisor personally, I felt fairly comfortable that the slipup was an accident--but that might not be the case all the time, especially if there is no Item 19 disclosure. Since they still wanted to move forward, we put them in touch with a local franchise lawyer who met with the franchisor to seek a solution to the problem.

Prior to closing on the franchise, the prospective franchisees did a very thorough and independent reevaluation of the franchise and created a business plan for the business. They called several franchisees in the system and determined for themselves the range of sales they could likely expect. At that point, while the franchise salesman had made a mistake, the prospective franchisees could honestly say they were no longer relying on that information, because indeed they had gotten the information they relied on from independent sources. They were then able to sign off on the questionnaire honestly and close the sale.

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