Unauthorized or Misleading Earnings Representations

To convince you to buy a particular franchise, a broker may make certain representations about income. Earnings claims may not be true, and sometimes, can be misleading even if literally true. For example, the figures may be based on earnings in an area where demand for the business’ goods or services is high. Or the earnings claimed may be based on outdated industry data. In some instances, earnings claims may be gross sales figures: when you factor in likely expenses, actual earnings can be far less. Because earnings representations may be misleading, many franchisors prohibit their sales representatives from making them.

Before using a franchise broker, ask yourself:

    * whether you need the services of a franchise broker. Can you get enough information shopping online or reading trade magazines?
    * whether the broker is paid by the franchisor. Are there any fees you must pay the broker? If so, how much you are willing to pay?
    * whether the broker’s commission depends on the price of the franchise. If it does, consider the fact that the broker may be leading you toward a higher-priced franchise. Ask about alternatives in the same field that may cost less.
    * how many franchisors the broker represents. If it’s a small group, the potential match-ups may be limited.
    * how the broker selects franchisors to represent. Are the selection criteria in writing? Ask to see them. How many franchisors has the broker turned down in the recent past?
    * about potential earnings claims. Verify whether the franchisor has authorized the claims. Ask the franchisor for the written documentation that lays out the basis for the claims. Think about consulting an accountant to determine whether the claims are reasonable and if they are applicable to where and how you intend to operate your business.

You should receive the names and contact information for other buyers of the franchise current and former franchisees. Talk to them, rather than relying on information from the broker alone.

Speak to them about their experience within the franchisor.