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Oregon Office:

Douglas D, Smith

PO Box 1034 

Sherwood, Oregon 97140-1034

Phone: (503) 840-0000

 

Utah Offices:

Bradley D. Smith

FranchiseSmith Utah, LLC

5508 West Kensington Circle

Highland, Utah 84003

Phone: (801) 615-1564

 

Douglas D. Smith

Franchise Smith, LLC

201 Red Pine Drive #4

Alpine, Utah 84004-5618

Phone: (503) 840-0000

 

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intended to be legal

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for obtaining legal advice

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Inadvertent Franchise Earnings Representations

December 12, 2012

Recently a new client asked me to review its franchise system website to ascertain whether it contained any information that could be problematic under state and federal franchise and business opportunity laws and regulations. In part here is my response:

 

I really like the look, feel and attitude expressed on your website. However, the several videos under the "Getting to Know Us" tab must be carefully reviewed and modified as necessary. The first video should be  removed immediately and replaced with information that does not contain any earnings representations or statements about actual or potential sales, revenues, profits, or earnings. I have not reviewed the other videos at any length. Let me know if you want me to.  On the other hand, we could take the information and create a new Item 19 disclosure. That will require proof to back up the sales and revenue numbers you give.

 

I note that you frequently use the words like “successful” and “profit.” Puffing words like these can be very dangerous, create misunderstanding by prospects, are generally disapproved by many state franchise regulators, and can inadvertently create liability under state and federal laws. I advise my clients to avoid them always.

 

Franchise prospects should feel free to and encouraged to talk with any existing franchisees. Existing franchisees can share all sorts of information with prospects, including success rates, return on investment, sales and revenue, profit margins, etc. However, none of this can be directed, coached or monitored by the franchisor and must never be delivered to the prospect by or through the franchisor – that means that some of the language under the "Franchisee Testimonials" tab creates a problem, too.

 

Buzz words such as “ high profit margins,”  “cost justifying expense,” “expectations exceeded,” “amount of business done in give time frames,” “successful,” “great return on investment,” "generate enough income to replace your full time job," ect. should never be found on a franchisor’s website or in its promotional programs. This is great information and you can and should encourage your prospects to hear this information from the “horse’s mouth” but not from yours.

 

In the future, you should  have me review all of your franchise offering related advertising and web page adjustments. Inadvertent or misdirected language basically can give a franchisee a “get out of jail free card” and can cause problems with the government franchise administrators.

 

No franchisor should ever make any representations of success, profit, specific or implied revenues, sales or earnings, or any other statements about earnings without an exactly corresponding disclosure in Item 19 of its Franchise Disclosure Document.

 

 




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