Obtaining financial information on a franchise

One of the things that might encourage someone to buy a franchise are expectations about earnings associated with a particular franchise location. It makes sense as a buyer that you would want to see projections for your location based upon the actual performance of other franchise locations (ideally, other stores that are similar to the store you would be operating in terms of location and market size).

Often, however, the typical disclosure package provided by a franchisor won’t include financial projections about your location, or any information about the actual financial performance of other franchisees. There are cases in Ontario dealing with the topic of misrepresentation on the part of a franchisor, as well as a relatively recent statute outlining the disclosure obligations of franchisors. If proper financial disclosure is not made, a disgruntled franchisee can have a number of remedies available to him or her, including rescission of the agreement (in other words, cancelling the contract). In the past, franchisors may have provided prospective buyers with overly optimistic, hypothetical projections about expected financial performance. Although franchisors can still supply projections, the information has been held, in certain cases, to be misleading. Out of an abundance of caution, franchisors now shy away from including this type of information in their disclosure packages.

The disclosure requirements provide that you are to receive audited financial statements about the franchisor’s operations, but they do not provide that you are to receive specifics about other locations (although you may be able to obtain past financial performance information if you are buying an already existing franchise location). A franchisor is required to disclose if any of their franchisees have recently failed, and provide contact information for franchisees in the province.

There is a lot of research involved in making the decision to buy a franchise. To get the full picture about what the financial performance of your franchise will be like, the best bet is to talk with other franchisees about their profitability and how long it took for their individual location to become profitable.