When it comes to franchising, sometimes a “consultant” is not a consultant. The common definition of a “consultant” is a person who gives professional advice or services, typically as an independent contractor. In franchising, the label “consultant” has now been adopted by those who are franchise sales brokers, and people can be misled by the title, “consultant.”

How Are Consultants Used in the Sales Process?

Every franchise consultant knows that sales of franchises are regulated by the Federal Trade Commission, and by about 15 states. The regulations are technical. Folks who sell franchises know they must comply with the rules. Among the regulations, franchisors and those who sell their franchises may not tell prospects “how much can they make.” Instead, a franchisor has the right to express in writing as part of their franchise disclosure document what are called under the FTC rule “franchise performance representations (FPRs). FPRs help franchisors inform prospects about their economic performance of franchised units that are operating, or affiliated nonfranchised units that are operating. The purpose of the FPR is to provide a guide of what might be expected if someone buys the franchise. It is not a guarantee of performance.

The FPR regulations are helpful to the franchise industry. Historical data regarding operations are usually more reliable than poorly kept books of nonfranchised businesses. Franchisors need to reliably collect metrics of their franchisees and typically have point of sale systems or software to run reports of their operations. Franchisor monitoring of franchised or related units add to the credibility of the FPRs. No franchisor is obligated to give FPRs, but if they do, then false or misleading FPRs can lead to liability.

Every franchise salesperson knows these rules. They know they cannot say to a prospect in form or substance, “You will make x dollars after one year” or “you will earn enough to buy a Mercedes.” The FTC explicitly prohibits such oral or written representations. Instead, the FTC rule requires the suggestions of how much a prospect can make be limited to the FPRs in the FDD.

The franchise sales consultant is made available by the franchisor to help “sell” the franchise within the limits of the FTC regulations. Sometimes, the franchise prospect is misled about “who” is a franchise consultant and their independence.

How Are Prospects Sometimes Misled About Franchise Consultants?

Franchise prospects shop for franchises the same way we shop for most products and services. If they have a need and hear about an opportunity, then they call for additional information. If they do not have a direct connection, they shop the internet. The request for information may be directed to the franchisor’s site, or it may be directed to a website that offers information about various franchises. For those seeking information, typically the website or franchisor asks that the prospect submit a qualification statement, sometimes referred in the industry as a “Q-Form.” The statement is basically a statement of interest and some indication of the financial ability of the prospect to purchase the franchise sought.

Most emerging franchise brands do not have the in-house staff to handle the sales leads from prospects. This is where the outside “consultant” enters. They may or may not say they are sales agents of the franchisor. If you thought about it, you might have reasoned that they receive their compensation eventually, but the prospect may not know from where or how much compensation they receive. They are not told whether the “consultant” is independent. They are not told that the “consultant” may be a commissions sales agent. They will be positioned as someone who will hand-hold the prospect through the sales-decision process.

When a prospect submits a Q-Form showing definite interest in buying a franchise, the FTC rule triggers the sending of an FDD to the prospect. On the last page of the FDD, there is a receipt page that the prospect is obligated to sign. Typically, this page is signed electronically through DocuSign. This is the page that discloses who are the “franchise sellers,” a term of art defined by the FTC. If you have been contacted by a consultant who is a franchise broker, that broker or consultant is required to be listed on that page as a “franchise seller.” Unfortunately, many franchisors and consultants, and even more prospects, do not know that this is a required disclosure. It is not only a required disclosure when the prospect receives the FDD. It is a required disclosure every time a “consultant” is acting as a franchise seller. The receipt must also be updated and given to the prospect.

How Is the Prospect Sometimes Misled by the Consultant?

Assuming that the honest consultant is acting in good faith, and not intentionally misleading, still the nondisclosure of the consultant as a franchise seller can still infect the buying decision of a prospect. First, the prospect may truly believe the consultant to be providing an independent assessment or comparison of several franchises the prospect is considering. The prospect may place inappropriate weight upon the statements of opinion by the consultant.

The consultant may be unconsciously biased toward the franchise brand that pays the most commissions or which is the easiest to sell.

Secondly, the consultant may be motivated to sell you more rights, territories or units than you need. The consultant may truly believe and honestly convince the prospect that the concept is hot, hot, hot, and that to protect the investment, the prospect should buy as much as they can get. The problem is that the prospect may not have the focus or ability to exploit all of the territory purchased. They may even believe that if they buy too much, it can be resold because there is so much demand for territory. The reality is that rarely are territories fully opened by franchisees and even more rarely on time.

Third, the consultant may gain trust by suggesting the prospect hire a franchise lawyer known and used by the consultant in the past. Do not trust the referral. The franchise lawyer may not be independent, competent or diligent. The prospect should seek counsel based on independent search.

Best Practices for Franchise Buyers

If you are contacted by a “consultant,” ask how they are compensated and by whom in writing. Ask if they are independent or whether they are associated with a particular franchise. If they suggest an accountant or a lawyer to review or negotiate your franchise agreement, even if they have your best intentions at heart, consider hiring someone with similar or better credentials who is less attached to the transaction.

Reprinted with permission from the January 10, 2023 issue of The Legal Intelligencer© 2023 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.