Franchise Earnings Projections (Financial Performance Representations)

An earnings projection is any statement of the sales, revenue, income or profit a prospective franchisee can expect: an average unit volume, a sample profit-and-loss statement, a payback period, or a salesperson's remark that owners clear $150,000 a year. US franchise practice calls these financial performance representations. Ontario's O. Reg. 581/00 uses the term earnings projection and does not define it.

Ontario does not require earnings information, and a franchisor may give none. What the regulation controls is the form that information takes once given, as part of the franchise disclosure document required by section 5 of the Arthur Wishart Act (Franchise Disclosure), 2000. Three related items are treated differently:

The regulation does not separately address historical results. A franchisor that shows the average sales of existing units to suggest what a new unit will do is, in substance, projecting, and the safer course is to give those figures the same basis, assumptions and inspection support.

Paragraph 3 of section 6 of the regulation provides that if an earnings projection is provided, the disclosure document must include a statement specifying:

1. the reasonable basis for the projection;
2. the assumptions underlying it; and
3. a location where information substantiating it is available for inspection.

Section 6 treats these items as prescribed material facts that must be presented together in one part of the document. In practice:

• Reasonable basis. The data behind the figure: which units, how many, franchised or corporate, how long open and over what period. A figure drawn from the top three of 20 units, or from corporate stores that pay no royalty, needs to say so.
• Assumptions. What the number takes for granted: rent, staffing and wages, owner's salary, royalty and advertising contributions, ramp-up time, financing costs and the local market.
• Inspection location. An address, typically the franchisor's head office, where the franchisee and its advisers can review the underlying records.

The Act also requires everything in the document to be accurate, clear and concise. A projection with an undisclosed basis or buried assumptions can make the whole document deficient, and Ontario courts can treat a materially deficient document as no disclosure at all.

Many disputes start outside the document: a spreadsheet emailed after a discovery day, a sales manager's comment, a broker's brochure. Several rules meet there.

• Single-document rule. Section 5(3) requires disclosure in one document delivered at one time. Figures handed over separately are not part of it, and if they are material, leaving them out of the document is itself a potential deficiency.
• Statutory damages. Section 7 gives a franchisee who suffers a loss a damages claim for a misrepresentation in the disclosure document or for any failure to comply with section 5, and deems the franchisee to have relied on a misrepresentation in the document. The claim runs against the franchisor, the franchisor's associate, the franchisor's broker, the franchisor's agent (a sales agent engaged by the broker) and every person who signed the document.
• Common-law claims. Section 9 preserves other remedies, so negligent or fraudulent misrepresentation claims over statements made outside the document remain available.
• No waiver. Section 11 voids any waiver or release of rights under the Act. In 2189205 Ontario Inc. v. Springdale Pizza Depot Ltd., 2011 ONCA 467, a franchisor's demand that resale buyers acknowledge they did not rely on it for the store's sales figures helped cost it the resale exemption.

Financial plans built around a franchise also attract scrutiny. In Mendoza v. Active Tire & Auto Inc., 2017 ONCA 471, the buyers had relied on a three-year plan with positive projections compiled by an accounting firm the franchisor helped them retain, and argued that the required assumptions were never disclosed; the Court of Appeal allowed rescission on other grounds, chiefly the one-signature certificate and out-of-date financial statements. Once the agreement is signed, the duty of fair dealing governs how both sides perform and enforce it, and an entire agreement clause cannot waive the Act's protections.

1. Whether the disclosure document contains earnings information. If a salesperson quotes figures that are not in it, ask for them in writing and ask why they were left out.
2. Which units the figure covers: how many, franchised or corporate, open how long, and whether closed or weak units were excluded.
3. What the figure measures. Gross sales are not profit; check whether royalties, advertising contributions, rent, wages, an owner's salary and debt service are deducted.
4. How the assumptions compare with your site: rent, staffing, ramp-up and local competition.
5. Access to the substantiating records at the stated location, with your accountant.
6. Contact details for current and former franchisees. The document must list Ontario locations and the Ontario franchisees who left the system in the last fiscal year.

Then build your own forecast with an accountant and test it against the total initial investment and your financing. The opening statements in every Ontario disclosure document already recommend independent legal and financial advice before signing.

A franchisor has two defensible positions: give no earnings information to anyone, or put a compliant projection in the disclosure document and give every prospect the same figures. The risky middle ground is a document that says nothing while sales staff, brokers or area developers quote numbers in meetings.

Useful controls include a written sales script, training for everyone who speaks to prospects, one approved earnings exhibit, and a process for refreshing it. If system results decline after delivery in a way that would reasonably be expected to have a significant adverse effect on the franchise's value, a statement of material change may be needed before signing. Lamba Law's free FDD readiness checker scores a draft disclosure package against the Act's requirements, and our guide on how to franchise your business in Ontario places disclosure in the franchisor's build-out sequence.

Daniel Kowalczyk is considering a burger franchise in Vaughan with a total initial investment of $780,000. At a discovery day, the franchisor's development director, Priya Raman, tells him Ontario stores average $1.4 million in sales and owners typically clear $180,000. The disclosure document he received contains no earnings information.

Daniel's lawyer asks for the figures in writing. The spreadsheet covers nine of the system's 16 Ontario stores, those open at least two years, and leaves out three that closed last year. The nine averaged $1.38 million in sales, but the $180,000 figure is before an owner's salary and loan payments and assumes rent of $6,800 a month. The Vaughan site's rent is $9,500.

After adjusting rent, wages and loan payments for his site, Daniel's accountant estimates about $61,000 a year before Daniel pays himself. Daniel asks the franchisor either to put a compliant projection in a new disclosure document or to confirm in writing that no earnings representations are made. The franchisor reissues the document with a projection stating its reasonable basis, its assumptions and a head-office inspection address. Daniel waits at least 14 days after receiving it and negotiates a lower franchise fee before deciding whether to sign.