Structurally unsound revenue forecasts from the franchisor
On 15 March 2017, the District Court of Limburg in eight similar judgments (including ECLI:NL:RBLIM:2017:2344) nullified the franchise agreements of various franchisees of the P3 franchise formula for error, because the turnover forecasts presented were unsound.
Before concluding the franchise agreement, prospective franchisees were provided with an information package containing a calculation model and a model business plan. Part of the calculation model is a calculation example with a turnover forecast for the first five years. Based on a realistic scenario, a turnover of no less than € 80,000.00 is forecast for a random franchisee in the first year. By entering some data in the associated calculation model, a prospective franchisee can also calculate his personal turnover forecast for the next five years. The completed calculation model always resulted in prosperous turnover forecasts in the present cases.
Not one of the ten franchisees has met the forecast and the majority have not even realized any turnover. This fact in itself already strongly substantiates the statement that the turnover forecast provided was unsound, as the difference between the forecasted turnover and the realized turnover is substantial and this occurs for all franchisees. However, this substantiation is not decisive, since the difference in turnover achieved and forecast may also have been caused by circumstances outside the franchisor, of which the franchisor could not reasonably have been aware when making the forecast. According to the court, it is therefore important to also check whether a sound market and business location study is the basis for the prognosis.
It is argued on behalf of the franchisor that it always concerns an estimate by two directors of the franchisor based on their own experiences as entrepreneurs within the sector in question.
However, it is unclear whether, and to what extent, the following circumstances have been taken into account in these estimates:
- the fact that the P3 franchise formula was not yet established;
- that the franchisees were all new to the industry;
- the franchisees still had to be trained and certified in the first year before they could start working independently;
- that the turnover data used showed a decline in turnover.
The court concludes that no proper market research was based on the turnover forecast and that the turnover forecast was unsound. The court nullifies the franchise agreements concluded.
Although it may be questioned whether the prospective franchisees were perhaps naive afterwards, the court ruled that the franchisees had no duty to investigate, given the incorrect statements by the franchisor. It seems that in particular the structurally flawed method used to prepare the forecasts and also the huge difference with the realized turnovers are attributable to the franchisor here.
mr. AW Dolphijn – Franchise lawyer
Ludwig & Van Dam Franchise attorneys, franchise legal advice. Do you want to respond? Go to dolphijn@ludwigvandam.nl .
Other messages
The (in)validity of a post-contractual non-competition clause in a franchise agreement: analogy with employment law?
On 5 September 2017, the District Court of Gelderland, ECLI:NL:RBGEL:2017:4565, rendered a judgment on, among other things, the question of whether Bruna, as a franchisor, could invoke the prohibition for a
Column Franchise+ – mr. J Sterk: “Court orders fast food chain to extend franchise agreement
The case is set to begin this year. For years, the franchisee has been refusing to sign the new franchise agreement that was offered with renewal, as it would lead to a deterioration of his legal position
Not a valid non-compete clause for franchisee
On 18 November 2016, the interim relief judge of the Central Netherlands District Court, ECLI:NL:RBMNE:2016:7754, rendered a judgment in the issue concerning whether the franchisee was held
Franchise & Law No. 5 – Acquisition Fraud and Franchising Act
The Acquisition Fraud Act came into effect on 1 July 2016. This includes amendments to Section 6:194 of the Dutch Civil Code.
Does a franchisee have to accept a new model franchise agreement?
On 31 March 2017, the District Court of Rotterdam, ECLI:NL:RBROT:2017:2457, ruled in interlocutory proceedings on the question whether franchisor Bram Ladage had complied with the franchise agreement with its franchisee.
Mandatory (market-based) purchase prices for franchisees
To what extent can a franchisor change agreements about the (market) purchase prices of the goods that the franchisees are obliged to purchase?