Franchise Disclosure in the Digital World: Proceed With Caution!

At what point does a Financial Performance Representation, also known as an Earnings Claim, cross the line beyond federally mandated franchise disclosure requirements?

Social media has created many opportunities to present and discuss franchise opportunities across multiple digital channels, often linking from one social media platform to another. As many franchisors jockey for a competitive edge (or for survival) and continue to increase their digital marketing efforts, it’s imperative they not lose sight of franchise disclosure requirements. Especially, if these efforts are spearheaded by a person or agency not familiar with franchise disclosure rules.

The practice of embedding financial information is growing. It’s no surprise considering the increasing number of online press releases, blogs, social media posts, and even books about a franchise brand or founder. There’s also the popularity of reality TV shows to consider.

Certainly, publishing financial information alone doesn’t necessarily create a financial performance representation. But, directly or indirectly referring candidates to the information is an earnings claim, and if the shared information is not in line with a franchisor’s Item 19 of their Franchise Disclosure Document (FDD), it does becomes improper or illicit.

Considering the linking capabilities in the digital space, often to the point of creating a cross-platform, multi-tiered effect, some self-professed industry professionals apparently believe they can get away with improper financial performance representation. Especially, as digital and social media continues to expand into new areas. As such, much of the activity is virtually under the radar of most authorities.

It appears the thought is, if enforcement of franchise disclosure is lacking in traditional areas, digital and social media marketing have become the new wild west!

Beyond the obvious illicit practices and potential ramifications to unsuspecting franchise candidates, also causing reason for concern is the impression it makes upon start-up franchisors that follow suit — often, not even realizing the practice may be improper. After all, they see it being done by individuals who they believe are reputable franchise professionals. So, why not follow the same practice that they unsuspectingly come to believe is actually a best practice?

Sure, everyone is responsible for their own actions, and ignorance is not a legal defense. However, if these practices, borderline or otherwise continue within franchising, more and more will participate to the point of it becoming a common practice, with many believing it has become a best practice.

Momentum will pick up with so-called thought-leaders promoting the practice as an effective lead generation strategy, influencing even more franchisors. Some will be unsuspecting. Some will just jump on the bandwagon.

At what point will these practices be considered to be out-of-control and intolerable, and detrimental to franchising? Or, will the franchise community just wait until another BurgerIM situation raises its ugly head, and with more media attention?