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Does a franchisor have to provide income projections to a prospective franchisee?
A franchisor is under no legal requirement to provide income projections to a prospective franchisee. However, in most cases the franchisor will give the prospective franchisee cash flow or income projections. The British Franchise Association’s code of ethics sets out the principles that bfa member franchisors should follow when presenting financial projections to prospective franchisees. There are many different ways in which franchisors present financial projections. Often franchisors illustrate what sort of gross and net profit might be achieved if certain turnover levels are reached. Sometimes franchisors show illustrations of what the franchisor or a franchisee have actually achieved in practice. The franchisor should clearly state which of the alternatives it’s has chosen for his illustration. In order to properly understand financial projections, you need to know what underlying figures the franchisor used to create them. Projections should be based on information showing what the franchisor or its franchisees have achieved in practice. However, no franchisee whose figures are used can be identified without his consent. You will not be entitled to see actual accounts that confirm any financial projections, although you could ask to see the figures that were used in the calculations. The most important thing is that you understand how the figures you are given are prepared and that you understand that no franchisor can guarantee with any accuracy any financial performance in a particular case. It is extremely important that you take your own proper accountancy advice in considering the financial aspects of the franchise being offered to you.
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