Franchisors who Over-Promise but Under-Deliver will risk Litigation!

franchisors liability

In a recent case the Court found that representations made by a franchisor to a potential franchisee were misleading and deceptive, or were likely to mislead and deceive the franchisee. The franchisor was consequently ordered to pay close to a million dollars in damages to the franchisee.

The franchisor provided cash flow projections, a break-even analysis, gross profit calculations and a summary of set up costs for a proposed franchised business.

The franchisee claimed that representatives of the franchisor made multiple representations about the positive prospects of the franchise. In addition to the financial documents, the franchisor published a statement on its website that franchised stores achieved high yields.

However, the actual set up costs were significantly higher than estimated and the actual sales figures were substantially lower than the forecast sales. To make matters worse, a similar business opened in the shopping centre, causing a further reduction in revenue.

Not long after, the franchise store closed its doors. The franchisee sued the franchisor. The Court found that there was no evidence presented by the franchisor that there were reasonable grounds for making any of the representations it had included in the information that induced the franchisee to buy the franchise.

This judgement is a reminder that if a franchisor is going to provide financial information, or a model of prospective earnings, or make statements as to the desirability of a particular site, then the franchisor needs to have reasonable grounds for making those representations or else they risk being sued when the franchise fails.

It is not sufficient that the franchisor’s documents include a disclaimer or warning to the franchisee to conduct its own investigation. If financial information is provided, ensure that it is accurate. If possible, it is prudent to avoid providing forecast financial information at all.