Should You Trust a Franchisor’s Financial Promises?

We all know that it is the objective of a franchisor’s marketing literature to paint as promising a picture of the company’s future as possible. One of the many items contained in a franchise disclosure agreement, and financial documents, is an estimate of income that a potential franchisee can expect. Popular websites like Facebook and Craigslist also are full of advertisements for licenses and franchises that promote the high-income potential of their businesses. Some franchisors, however, go a little overboard and make financial promises that border on outright fraud.

According to the website www.patch.com, “Pie Five, a fast-casual pizza franchise is being sued by Chicago-area franchisee owner, Carl Dissette, for breach of contract and fraud. The lawsuit alleges that Pie Five and Rave overstated financial figures to make the restaurants seem more attractive when Pie Five was actually losing money.”
Source: http://patch.com/illinois/oaklawn/pie-five-pizza-says-bye-bye-oak-lawn-after-abrupt-closing

Online taxi service giant Uber was recently forced to pay $20 million to drivers that were misled by Craigslist ads that their drivers could earn around $25 per hour when in fact only 10% of their drivers actually earned that much. The FTC claimed correctly that Uber lured drivers with a false and misleading advertising claiming that drivers earned up to $90,000 in New York and $75000 in Philadelphia when they actually earned only about 2/3 of those figures. The FTC also found fault with Uber’s claims that the company would provide low-interest rate financing for driving vehicles for drivers with poor credit when in fact drivers were offered higher than average interest rate loans. Source: http://www.moneylife.in/article/uber-to-pay-20-million-for-allegedly-misleading-drivers-in-us/49580.html

There have been many other cases where a franchisor, or their sales agents, overstate a franchisee’s potential sales or income. As a rule of thumb, it is a good idea to at least take a franchisor’s estimate of profits with a grain of salt as they will always be tempted to push the envelope of what can and cannot be said as far as possible in order to lure franchisees to invest in their business.