Financial Performance Representations in Digital Space – Friend or Foe to Franchising?

At what point do you believe a Financial Performance Representation crosses the line outside franchise disclosure requirements?

As discussed at various break-out sessions during the recent IFA Convention, social media has created many opportunities to present and discuss franchise opportunities across and through multiple channels, often linking from one social media platform to another. As many franchisors jockey for a competitive edge and increase their social media efforts, it’s important not to lose sight of franchise disclosure requirements.

The practice of embedding financial information within online press releases, blogs and even within Facebook posts, appears to be growing. Certainly, publishing this information by itself doesn’t create an FPR. But, directly or indirectly referring candidates to the information is an FPR, and if the information is not part of a franchisor’s Item 19, it becomes an improper FPR.

Considering the linking capabilities within social media, often to the point of creating a cross-platform, multi-tiered effect, some so-called, self-professed industry professionals apparently believe they can get away with improper FPRs. Especially, as social media is still “relatively new” and growing into new areas, misunderstood by many, and virtually under the radar of most authorities.

It appears the thought is, if enforcement of franchise disclosure is lacking in traditional areas, social media has become the new wild west!

Beyond the obvious illicit practices and potential ramifications to unsuspecting franchise candidates, what also causes reason for concern is the impression it makes upon start-up franchisors that follow suit – often, not even realizing the practice may be improper. After all, they see it being done by individuals who they believe are reputable franchise professionals. So, why not follow the same practice that they unsuspectingly come to believe is actually a best practice?

Sure, everyone is responsible for their own actions, and ignorance is not a legal defense. However, if these illicit practices continue within franchising, more and more will participate to the point of it becoming a common practice, with many believing it has become a best practice. Momentum picks up with so-called thought-leaders promoting the practice as an effective lead generation strategy, influencing even more franchisors. Some will be unsuspecting. Some will just jump on the bandwagon.

At what point will these practices be considered to be out-of-control and intolerable, and detrimental to franchising?

How would your franchisees answer this question, “Does your franchisor have integrity?”

Integrity is what you do when nobody is watching!

Some franchisors appear to believe that when a person asks for the franchisor’s FDD they need not give it.

Why? Here is, slightly edited a franchisor’s broker’s answer,  which appeared on a major business social network.

“Because they [franchisor] are not required to provide an FDD upon request.

Here is the excerpt from the FTC 2008 updated ruling:

“Upon reasonable request, franchisors also must furnish a disclosure document to a prospective franchisee earlier in the sales process than 14 calendar days before the franchisee signs or pays.

The failure to comply with a reasonable request for an earlier delivery is an independent violation of the Rule. This does not mean that a franchisor must tender a disclosure document to any person who asks for a copy.

Rather, it applies where the parties have taken steps to begin the sales process.”

The problem is that many franchisors begin a validation process with the prospective franchisee, but believe that they haven’t “taken steps to begin the sales process”.

But, the way I see it, is if a candidate is on a validation call then I think it’s hard to dispute that you’re not knee deep in the sales process!

Some brokers will argue otherwise.

“If I took a lead to many franchisors and after the first call said to the franchisor, “the candidate would like to reasonably request an FDD at this time” most of them WOULD indeed laugh or explain their “sales process” to me where the FDD is provided after the application which comes after the webinars and other phone calls.

I can only think of a handful of times where an FDD was provided after the first call with a franchisor.”

Irrespective of FTC Franchise Rule enforcement, it’s not the candidate’s duty to know that they are entitled to an FDD upon reasonable request, it is the duty of the franchisor to comply with the FTC Rule.

If you as a broker or the franchisor has a bona fide prospect considering a particular franchise you as the broker must communicate an FDD request to the franchisor. The franchisor must fulfill the request and track and record all FDD requests.

Even if the FTC is not watching, it is not okay for franchisors and brokers to break the rule. I recommend taking a look at The Franchise Sellers Handbook. It’s a great resource and most likely will answer a lot of questions that you may have.

Remember, integrity is what you do when nobody is watching!

*Reprinted from International of Association Franchisees and Dealers Feb 2012

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Social Media Policies Within Franchising: The Debate Continues

In the continuing debate about making the case for social media policies within franchising, below is an article by Attorney, Chad Finkelstein, expressing his opinion on the matter. So, as a franchise professional, we’d love to hear your opinion as well!

Franchising and Social Media
by Chad Finkelstein

As posted: Financial Post on October 25, 2010

Whether you are a franchisor or a franchisee, the realities of social media likely already affect you. Franchisors need to determine whether, from a marketing perspective, it makes sense for them to have profiles on forum such as Facebook, Twitter and MySpace. Many already do, but depending on the nature of your business, it is not always an ideal method of promotion.

If that type of online marketing suits the strategies of the franchise system, then the next question to ask is whether franchisees should be permitted to have their own social media websites – for instance, a Facebook page for that particular franchised location. The franchisor will need to decide whether the benefits of widespread marketing on these popular websites outweigh the costs of giving its franchisees that much control over advertising the brand.

Accordingly, it is a good idea for franchisors to develop social media policies, and for franchisees to ensure that those policies are not too restrictive. If you are an existing franchisor or franchisee, your franchise agreement likely already states that franchisees cannot conduct any internet advertising without the consent of the franchisor. While that may have made sense at the time it was drafted and agreed to, the practical realities of business today means that franchise law in Canada has to evolve to reflect new technologies and marketing platforms.

As a result, franchisors should consider adding social media policies to their standard agreements, and franchisees should consider requesting them where they do not already exist, so that the franchise system as a whole can benefit from this new world of online marketing.

Chad Finkelstein is a franchise lawyer at Gowling Lafleur Henderson LLP in Toronto.


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