Financial estimates in the hospitality industry

A recurring subject in franchising is liability in the case of incorrect forecasts. In a fast food market that is under pressure due to the current economic situation, it is important that franchisees realize that not only the market can be a cause of the fact that reality lags behind the forecasts. Franchisors, in turn, should realize that the information they provide, even if the figures have been drawn up by a third party, must check for accuracy. Failure to do so may result in extensive liability.

Recently, the Den Bosch Court of Appeal issued a judgment on this subject. The court ruled that the franchisor was liable for providing incorrect forecasts and advice to its franchisee prior to entering into the franchise agreement. In the judgment, the court clearly indicates that franchisors have a heavy responsibility with regard to the provision of information and advice to their (prospective) franchisees prior to entering into a franchise agreement.

In the matter before the court, the franchisor had provided its franchisee with a sales, margin and profit forecast prior to entering into the franchise agreement. The aforementioned forecast was prepared by and based on a third party study. This third party was engaged by the franchisor. Unfortunately, these forecasts were not met by the franchisee.

The poor market turned out not to be (merely) the cause of the fact that the forecasts were not achieved. The forecasts turned out not to be based on correct assumptions. For example, the turnovers and margins turned out not to be based on historical data of the location, which the franchisee had taken over from the franchisor. This information was found to be available at the franchisor. Furthermore, none of the franchisees within the franchise formula were able to achieve these figures. The rental costs were also budgeted many times lower than they turned out to be in reality.

The franchisor defended itself by stating that the report had been prepared by a third party. The Court of Appeal made short shrift of this, since the third party had been engaged by it and the franchisor had the disposal to check the report for inaccuracies since it had the correct information as the franchisor.

The franchisor also defended itself by the defense often heard in similar cases that the franchisee was a bad entrepreneur. Since the prognosis was based on incorrect facts known to the franchisor, the franchisor cannot defend liability with the aforementioned defence, the court ruled.

The court ruled that the franchisor was liable for the decline in the franchisee’s assets that had occurred since the franchise agreement was entered into.

In view of the fact that in most cases the franchisee is largely dependent on information from the franchisor prior to entering into the franchise agreement and that much of the information provided by the franchisor to the franchisee is not or hardly verifiable, this warning from the court is fair to franchisors.

Franchisors and franchisees in the fast food and hospitality industry should be aware of the important role of the information to be provided and received before entering into a franchise agreement. Certainly in a changing market, franchisors should check the forecasts to be issued by them. Finally, it should be noted that, although this was not at issue in the judgment cited above, a franchisee must critically assess the information received within its capabilities.

mr. EG Snoek, franchise lawyer

Ludwig & Van Dam Franchise attorneys, franchise legal advice Would you like to respond? Mail to info@ludwigvandam.nl