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What happens if my franchise doesn’t perform as expected?
John Pratt writes:
First, you have to work out who is responsible for the poor performance because if it’s not attributable to the franchisor, a disappointed franchisee will not have a claim.
The issue of performance normally arises in the context of franchisees being given information by a franchisor to encourage them to enter into the franchise agreement.
Often, franchisors provide cash flow forecasts and projections that set out initial start-up costs and likely turnover and profitability. If those levels are not achieved, the franchisor may have done nothing wrong because projections are simply projections and not guarantees.
If, however, the projections provided were not based on the average performance of franchisees and paint far too rosy a picture of the franchise, then almost certainly they will constitute misrepresentations and would be likely to be fraudulent misrepresentations, which generally franchisors cannot protect themselves against with a provision in the franchise agreement.
In other words, if things don’t work out as well as a franchisee would hope and providing the poor performance is not attributable to them and it falls far short of the projections provided, which were not based on the average performance of franchisees, a franchisee may well have a claim against the franchisor.
John Pratt is senior partner at specialist franchise firm Hamilton Pratt and has advised franchisors for over 25 years.
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