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Do franchisors guarantee a certain level of business for their franchisees?
Shelley Nadler writes:
Very few franchisors will be prepared to give guarantees of what financial performance will be achieved in a franchise.
A franchisor should be prepared to disclose actual figures that have been achieved in its operations or by franchisees, but no franchisee should rely on any financial projections as being a guarantee that they will be achieved.
There can be many reasons why they’re not achieved, including market trends and economic factors, as well as the franchisee’s own performance capability and deficiencies.
The British Franchise Association’s code of ethics contains guidance on financial projections, setting out the principles member franchisors should follow when presenting them to prospective franchisees.
Franchisors must state the basis on which the figures were obtained. For example, they should explain if financial projections are based on what the franchisor or its franchisees have achieved in practice or are illustrations of profit performance that can be expected if certain turnover levels are achieved, which should be the same as or no better than those achieved by the franchisor or on average by its franchisees.
Prospective franchisees can always take advice from an accountant in relation to the financial information presented to them by a franchisor.
Shelley Nadler is a legal director in Bird & Bird’s international franchising team and has many years’ experience of advising on all aspects of franchising.
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