Should franchisors help franchisees do business plans?
Sometimes, an inexperienced franchisee may approach a franchisor and ask for assistance creating a business plan. However, it is important for franchisors to understand the risks associated with providing this level of guidance.
It is generally inadvisable for a franchisor to prepare a business plan for a franchisee.
As an independent business owner, the franchisee should be responsible for preparing a business plan. If they lack the skills or ability to do so, they should seek assistance from independent business advisors and accountants.
Franchisors are required to advise prospective franchisees to seek independent legal, business and accounting advice and obtain a certificate from a franchisee acknowledging they have either sought this advice or been advised to seek it but nonetheless have chosen not to.
If franchisors are of the opinion that a prospective franchisee requires assistance in preparing a business plan or is approached by a franchisee seeking assistance, they may wish to insist the prospective franchisee seeks independent business and accounting advice.
However, some franchisors do provide earning information to franchisees, which franchisees and their advisers may use in preparing their business plan.
Franchisors who provide earnings information are specifically required by the Franchising Code of Conduct to include the following details:
- The facts and assumptions on which the projection or forecast is based;
- The extent of the enquiries and research undertaken by the franchisor and any other compiler of the projection or forecast; and
- The period to which the projection or forecast relates.
Providing franchisees with earnings information may be necessary to allow a franchisee to carry out due diligence and prepare a business plan.
But it could also expose a franchisor to liability in the event that the information is incorrect, inaccurate, misleading or prepared without reasonable grounds to support it.
Accordingly, franchisors need to act with caution when it comes to providing earnings information. In particular they may:
- Consider only providing historical information that can be independently verified and provide details of the context and parameters of that historical information. It is important to emphasise that individual businesses may be subject to different constraints or circumstances and that results could vary. For example, rent, location and demographic, competition and cost of ingredients over time.
- Exercise a high degree of caution before making statements on future matters such as projected earnings. A franchisor who does so, and provides predictions that are without reasonable grounds, is at risk of liability for misleading or deceptive conduct.
Accordingly, franchisors should exercise caution before assisting franchisees with a business plan and maintain clear records to support any information provided.
Authors: Warren Scott, Partner, Mills Oakley & Jacqui Murphy, Associate, Mills Oakley