Should franchisors disclose earnings information?

The question of whether a franchisor should give a prospective franchisee an indication of what they might earn will often be answered with a “no” by the franchisor’s advisor and a “yes” by the advisor to the franchisee. The practical reality is that most people will want to know – before they hand over money to buy a franchise – how much they are likely to earn.

This issue of earnings information and earnings claims is a particularly hot topic in the United States. The International Franchise Association conference, held in Palm Springs earlier this year, provided a unique opportunity to assess what franchisors in the United States are doing in comparison to franchisors in Australia.

Should franchisors give earnings information?

It is not a case of ‘should’, but if you want to sell a franchise, then you will most likely have to give earnings information.

Franchisors in the United States are similar to their Australian counterparts in that approximately 50 per cent of franchisors give earnings information to prospective franchisees.

Whether or not earnings information is given depends, to a large extent, on the industry. For example, the sector that has the highest number of participants who give earnings information is the hotel industry, where there is a high level of investment.

Similar to Australia, there seems to be a connection between the investment costs for the franchisee and whether earnings information is provided. The greater the investment, the more likely it is that a person will want to know what their return will be on that investment.

What type of information is being given?

If you decide to give earnings information, what type of information should you give? Franchisors in the United States are again in sync with their Australian counterparts. In short, those that provide earnings information are mainly giving historical figures.

Furthermore, advisors in both the United States and Australia encourage franchisors to give historical figures, where they are available, over and above the options of providing projections or forecasts. This then enables prospective franchisees to review the historical figures and draw their own conclusions as to how those figures relate to the business that they are considering buying. But, be warned – the giving of historical figures is not without its dangers!

How to verify earnings information

There is only one way to do this and that is to audit the franchisees’ books. Auditing by franchisors is much more common in the United States than it is in Australia. There are a number of reasons why auditing is not popular in Australia. Apart from the relationship issues, there is also the issue of who is going to pay for the audit.

If you are giving historical figures without verifying those figures, you run the risk of a misleading and deceptive conduct claim, should those figures be found to be inaccurate.

There are typically three types of franchisees in every system. There are your ‘high performing’ franchisees. These franchisees are usually highly motivated, entrepreneurial and love to share the secrets of their success with others. Your ‘middle of the road’ franchisees are probably your safest bet, but experience has shown that they are not the most responsive in providing information. Finally, you have your ‘poor performing’ franchisees. They love to talk to prospective franchisees, but generally what they have to say is not going to help you sell a franchise.

What are you required to do under the Franchising Code of Conduct?

If you give true historical figures, then there are no additional requirements under the Franchising Code of Conduct. However, you still have obligations under the Trade Practices Act 1974 (Cth) to ensure that the information is not misleading.

What most franchisors probably don’t realise is that if you change these figures even slightly – for example, if you use figures for your company stores, but factor in royalties and marketing fees – then there is an argument that the figures are no longer historical and are, instead, a projection or forecast.

Access the wealth of information in the Franchise Council of Australia is a not for profit membership organisation that is the peak body representing the franchising sector in Australia.