The business plan in franchising: advertising tool or boomerang?
Business plans are very widely used in franchising in Italy, but they need to be used properly, otherwise they can turn into a real boomerang for the franchisor. In fact, if a franchisee does not meet the forecasts contained in a business plan, he may sue the franchisor for damages or for early termination of the contract. Moreover, the AGCM can impose heavy sanctions on franchisors for misleading advertising.
1.Business plans: how are they used in the Italian franchise context
Business plans are very widely used in franchising in Italy, especially in the negotiation phase, to illustrate the advantages that the franchisee enjoys by joining a franchise network.
In practice, often franchisors, spontaneously or requested by the aspiring affiliate, show or deliver to them a forecast of the profits that will be obtained as a result of joining his network, in light of the costs that will have to be incurred.
These forecasts can be formulated in the most varied way, with greater or lesser degree of detail, with greater or lesser reference to the actual market in which the franchisee will operate, etc. In any case, it is obvious that almost always the business plan contains positive and encouraging projections about the profits of the franchisee, in order to positively influence his decision.
However, this is an instrument to be handled very carefully by franchisors. Let’s see why.
It is not uncommon that, in the course of the franchise relationship, there is a difference between the data indicated in the business plan and the profits actually achieved by the franchisee. Sometimes this difference is negligible; at other times it is instead relevant.
In the latter cases, the franchisee, who finds himself in a situation of difficulty – unfortunately often recurring in the current Italian economic situation – seeks to assert the prospects contained in the business plan that had been delivered to him in order to promote a legal action against the franchisor to obtain compensation for damages, or simply to early terminate the franchise agreement which has now become excessively burdensome and unprofitable for him.
In such a situation, the business plan from a formidable advertising tool can turn into a real boomerang for the franchisor.
2.How to make a business plan legally “safe”
How then to make a business plan in the franchise legally “safe“?
First of all, it is good to clarify that there is no obligation for the franchisor to provide the franchisee with a business plan before signing the contract, given that Italian Law n. 129/2004 on franchising, which provides for a number of disclosure obligations for the franchisor, does not contemplate business plans among them.
Having said that, if the franchisor decides to use this instrument, it is advisable to use particular caution.
In fact, although from a legal point of view, there is no responsibility for the franchisor vis-à-vis the franchisee if the latter does not actually achieve the profits that were received in the business plan – given that the franchisee is considered a self-employed entrepreneur that fully bears business risks, often linked to objective market situations or subjective capacities of the franchisee itself – it is also true that failure to implement the forecasts contained in a business plan can place the franchisor in a risky situation.
This happens when the business plan delivered to the franchisee contains grossly inaccurate, incomplete or even false data or information. In this case, given that the franchisee inevitably relies on the business plan during the negotiations – and indeed this is the document that more than any other is the determining factor that drives a person to affiliate to a particular franchise network – the same he can obtain the termination of the franchise contract, resulting in compensation for the damages suffered.
So the first suggestion for franchisors to avoid legal risks is to base the business plan on real truthful and objective data.
But there is another aspect, perhaps even more important. The business plan is in fact an advertising tool, and as such is subject to the assessments of the Italian Competition Authority (AGCM). A business plan that contains untruthful claims, or anyway whose truthfulness is not objectively demonstrable, about the possible profits deriving from the commercial affiliation, could therefore be considered misleading advertising, and therefore can expose the franchisor to even high pecuniary sanctions , by the AGCM.
In fact, already in many cases the AGCM has imposed sanctions on various franchisors for having generated misleading messages about the economic results achievable through affiliation, e.g. prospecting “certain” profits while they were actually highly uncertain, as they depended on the most diverse variables.
It is therefore advisable for the franchisor to prepare with great care and precision the business plan addressed to the aspiring franchisees, so that the same:
- be as consistent as possible with the specific business reality in which the franchisee will operate;
- contain prudential data and forecasts;
- is based on objective and demonstrable criteria;
- contains specific caveats about the non-binding nature of the data contained therein as well as the fact that the same contains mere forecasts and not promises of result, whose outcome may depend on circumstances that cannot be controlled by the same franchisor and / or related to the franchisee.
To sum up, consequences for non properly using a business plan according to Italian Law can be quite severe for foreign franchisors. Therefore, careful planning and adequate legal counseling from a local law firm is highly recommended.
Avv. Valerio Pandolfini
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The information contained in this article is of a general nature and is not to be considered an exhaustive examination of the various issues, nor is it intended to express an opinion or provide legal advice. Specific legal advice must be provided with regard to individual cases.
