Prohibiting Franchise Owners from Talking to Franchise Candidates: A Good Idea?

I recently reviewed a franchise disclosure document for a client that had an Item 20 disclosure stating that the franchise owners signed confidentiality clauses restricting them from discussing their experiences with any prospective franchise owners.  Such a clause isn't unheard of, but it is, in my opinion, not best practices for a franchisor if they're interested in selling franchises.  To be fair, such a clause is understandable and maybe even warranted.  Franchisees are busy running their businesses and their responsibility should fall mainly within that realm. Ultimately it's not their job to field phone calls from interested franchise purchasers.  Further, it's entirely possible that without such a clause, the franchise owner could disclose information to a would-be competitor or other counterfeit with nefarious intentions.  Fair enough: leave the franchise sales up to the franchisor and restrict the franchisees from talking to interested purchasers.

But is this really the purpose behind such a clause?  To keep secret information secret?  Probably not.  After all, any franchise agreement worth its salt already has a sturdy non-disclosure agreement prohibiting the franchisee from discussing proprietary information to outsiders.    What I'm talking about here is an additional clause that restricts franchise owners from discussing experiences with the franchisor, their experience as a franchisee, and their business's financial information.  

Confidentiality_clause_FDD

If there is no Item 19 (Financial Performance Representations), then no there is no data as to how much money the franchise owners bring in.  And federal franchise law prohibits franchisors from making any statements regarding the financial possibilities of a franchise.  So, without an Item 19 and with a gag-order on franchise owners from discussing their financial status with prospective franchise owners, then there is no way for a prospect to get any information about how much she can expect to make.*  

Is there any other investment where you put down tens of thousands of dollars and have no clue as to what you're getting yourself into?  Maybe, but not good ones. 

So what is a franchisor supposed to do if it doesn't want its franchisees to talk with prospective owners?  The answer to that depends on why the franchisor wants the restriction.   

If the reason a franchisor doesn't want the franchise owners talking with prospects is truly about time management, then franchisors can put systems in place so that franchisees aren't blabbing to just to anyone who calls.  The simplest way to do this is to tell your franchise owners when you are working with a new prospect, give them the prospect's name, and tell the franchise owner that she should be expecting a call.  If the franchise owner gets a call from someone that is unknown, well then, the franchise owner knows that that person hasn't really been working with the franchisor.  Simple as that. 

If the reason for wanting a confidentiality clause comes from not wanting the franchise owner to disclose sensitive information, then review the terms of the Non-Disclosure Agreement with the franchise owner.  If your franchise agreement doesn't have a confidentiality clause, then you might not have a very good franchise agreement! (And we can help with that, by the way).

But if the reason for wanting a gag order on franchise owners is because your system is still young, or you don't think your franchise owners are necessarily that happy to be part of your franchise, or  because they aren't making any money, then that information really shouldn't be something that should be kept from a prospective owner.  Yes, you're in the business of selling franchises, but your ultimate goal should be to have a healthy franchise model that your franchisees want to talk about and recommend to others.   Keeping the not-so-good information under wraps is a great way to scare off a prospective owner; in my opinion, it's much better to have a franchise owner talk to prospects about both the good and the bad, rather than having a prospect infer that it's all bad because of a too-strict confidentiality clause. 

If you've received a Franchise Disclosure document with the Item 20 disclosure, let's chat.  We can help you navigate through what this means and if the franchise opportunity is still a good investment. 

*Back calculations from an audited P&L could give an indication of the overall income of every franchise owner if the royalties are based on percentage of income.  If the royalties are flat-rate, then those calculations are not possible.

 

Karen Cockrill

Karen Cockrill