The Use of Financial Performance Representations by Canadian Franchisors – Part II: Earnings Projections
In this ongoing Legal Insight series, we will discuss some of the regulatory requirements and legal issues concerning financial performance representations, or “FPRs” as they are sometimes referred to in the United States.
In our previous installment in this series, we discussed the mandatory inclusion of the franchisor’s financial statements and other historical data in the disclosure document. In this installment, we will discuss the optional provision by the franchisor of earnings projections.
Each of Canada’s common law provincial franchise statutes permits projected financial performance to be disclosed. Such projected financial performance is described in the various statutes as “earnings claims” or “earnings projections”.
The statutory definitions vary slightly by province, but are generally similar to the definition of FPR in the United States legislation (see our previous post for the definition).
If earnings claims/projections are being disclosed, they must:
- Include the underlying bases and assumptions;
- Indicate to the prospective franchisee where information that substantiates the projection is available for the franchisee to inspect.
In most of the provinces that have enacted franchise legislation, earnings claims/projections must also:
- Indicate whether the projections are based on actual results, and if so, to what extent those results belong to franchisees as opposed to corporate locations, and in what markets those locations are;
- If the projection is based on a business operated by the franchisor, indicate that the information may differ in respect of a franchise operated by a franchisee.
(Ontario does not require these additional indications.)
Earnings projections, if disclosed in the disclosure document, must, like the rest of the disclosure document, contain all of the material facts and be true.
Some provinces additionally require the projections to be based on reasonable assumptions/bases. (Ontario does not require that additional qualification).
Earnings projections can take many different forms. The courts can be expected to interpret any representation given to the prospective franchisee as to past or future sales, costs, income, revenue or profits as a projection that must comply with the relevant statutory disclosure obligation.
Franchisors may be incentivized to share earnings projections with prospective franchisees in order to finalize the sale; however, franchisors should recognize that earning projections, if given in a fashion that fails to comply with the statutory disclosure obligations, can form the basis of a claim for rescission or misrepresentation by disgruntled franchisees.
Franchisors have developed different strategies to approach this dilemma, such as the inclusion of language in the franchise agreement disclaiming any reliance by the franchisee on projections that may have been provided prior.
Prospective franchisees should scrutinize, with the benefit of professional advice, any earnings projections (and financial statements) disclosed by the franchisor, and should make efforts independently to verify financial data by consulting with existing franchisees.